Kulicke and Soffa Industries Q4 2023 Earnings Call Transcript

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November 16, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Kulik and Safa 4th Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Joe Elgindy, Senior Director, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you. Welcome everyone to Kuelikan Safa's fiscal Q4 2023 conference call. Fuzin Chen, President and Reference today should be considered in addition to, not as a substitute for or in isolation from our GAAP financial information. Complete GAAP to non GAAP reconciliation tables are included within the latest earnings release and earnings presentation. Both are available at investor.

Speaker 1

Kns.com, along with prepared remarks for today's call. 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 Keuligan Safa that could affect our future results and financial condition, please refer to our recent and upcoming SEC filings, specifically the 10 ks for the year ended September 30, 2023, and the 8 ks filed yesterday.

Speaker 1

With that said, I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.

Speaker 2

Thank you, Joe. Before discussing our business performance, I wanted to first reference the humanitarian crisis in the Middle East. Like many of our industry peers, we have had a long term presence in Israel, where we develop and produce our precision capital products. Our team based in our HIFAR facility have delivered Meaningful innovation and the leading product over the years, and we are pleased to report that they are not in a high risk area. However, we continue to hold for a quick and a peaceful resolution.

Speaker 2

As a global company with a diverse employee And the customer base, we are committed to strengthening our diversity and including initiatives to foster Collaboration, mitigating head and bias and create growth opportunity. Earlier this week, we successfully host our in aguero evaluating women in engineering and the tech summit in Philadelphia. This well attended event We are grateful to be able to host this type of event, which stands as a testament to our dedication to enabling change and exercising leadership within our local communities. Turning to our business, we have seen clear sequential improvement in key markets, but our broader market recovery will be greater. We anticipate the sequential change into the December quarter being largely seasonal and in line with our long term average.

Speaker 2

Furthermore, based on discussion with customers, external forecast and the gradually improving utilization data, we anticipate and moderate We made improvement into the March quarter and a stronger second half driven recovery. Since our prior March quarter, we have seen significant improvement in the general semiconductor end market and some recovery within LED. At the same time, automotive and the memory continue to be sub newton. Regardless of near term industry condition, we remain very aligned with the major technology transition and are actively and intensively Engage in qualification for our advanced packaging, automotive, defense and advanced display solution with multiple Industrial Leading Customers Coupled with ongoing improvement in the ball bonding business, This focused engagement will create more traction and momentum in the second half, which we anticipate will be sustained through 2025. We have also increased our repurchase activity and remain optimistic As we execute on several key long term projects, we recently announced the 4th consecutive annual EBITDA raised and we continue to maintain the highest dividend year relative to U.

Speaker 2

S. Industry peer. For the September quarter, we delivered $202,300,000 of revenue, dollars 23,400,000 of net income and the $0.51 non GAAP EPS. We continue to see improvement in general semiconductor, which increased 50% sequentially, providing another clear indicator that we are well beyond trough market conditions. This sequential improvement was primarily due to higher demand for our laser series ball bound platform, which is best suited for the most complex wire bonding application.

Speaker 2

We have also seen a pickup in demand for emerging vertical Wire application increasingly deployed in mobile and IoT based application to mitigate RF Interference between bands. We look forward to ongoing technology driven change and the improving Conditions within the key global bounding market. Separately, we are well positioned to further optimize our high volume business with the recently introduced Powercom and the PowerNEXT platform. This new system will provide additional value and the margin opportunities as they ramp over the coming years. Within LED, we have also seen sequential improvement in the general lighting which we associated with the U.

Speaker 2

S. Incandescent ban that took place this past April. We at the LightSpeed, we continue to make technical progress with the Luminex platform and are approaching 5 9 year And we also continue to execute toward Project W deliverable for Automotive and Industrial. Nickel dynamics, including high interest rate, have impacted end user demand and also near term industry CapEx need. Our Automotive and Industrial Business remain a validated enabler of battery assembly and the power semiconductor applications, which are supporting long term electric vehicle and sustainable energy transition globally.

Speaker 2

We have recently assessed an order of 120 battery assembly system, which will be recognized primarily in the March Q3 of 2024. Finally, as indicated in last week in recent weeks, The memory market will remain challenging near term. We currently see improving price dynamic as well as specific technology driven opportunities We think next generation high bandwidth memory and continue to execute on emerging vertical fan out or VFO application. As briefly discussed last quarter, VFO is being deployed as an alternative to 3 c Conveer or TSVs to assemble low power dynamic RAM in a 3 d format. This cost effective and flexible VFO approach enable Higher density DDR, which support large and established market such as power efficient mobile devices and other Edge based applications.

Speaker 2

We are currently engaged in evaluation with several memory leaders and are well Next, I wanted to discuss our participation within Broadlink artificial intelligence application and provide brief update on Advanced Display and Dispense. 1st, on AI, similar to how PCs, smartphone and connected devices have increased the capacity need for the industry. Artificial intelligence applications are directly creating both unit and a technology based growth opportunity for many of our businesses. To be very clear, we have taken shares with optical With high volume logic and also with leading edge heterogeneous devices, This new position have all enhanced our ability to support long term AI trend, which are very much centered on emerging assembly techniques. Considering our growing alignment with the key artificial intelligence strength, I would like to outline how we are specifically was to what we consider to be the 3 key building blocks of AI: machine learning, network infrastructures and the device on the edge.

Speaker 2

First, machine learning has received most attention over the past few quarters. Here we see increasing multi die applications such as high bandwidth memory, multi die GPU based application and emerging chiplet and Heterogeneous based CPUs. We continue to directly support leading heterogeneous application with our thermal compression portfolio And anticipate both higher banks memory and multiple GPU based application will begin transitioning to finer and finer pitches, in question the need for our precision solution. As both HBM and the GPU based application continue to move To final IOPGs, we expect our solution to be increasingly competitive. As we work with several key customers, we continue to believe KNS is a significant enabler to the success of most leading edge Our tools in both qualification and production are extremely competitive and the customer engagement have strengthened over the past 2 quarters.

Speaker 2

We look forward to sharing more feedback on the current evaluation and qualification status of our key leading edge logic opportunity over the coming months. Next, as AI become more integrated with existing user application, Deploy at work, at home and through the cloud. There is a growing need for higher bandwidth and more efficient Networking solution. This need is being met with emergent silicon photonics technology deployed in copetted optics devices, which are anticipated to grow at 66% EBITDA through 2,033. Currently, our silicon photonics system are supporting a leading customer's core package optics production, Used to support network switching application.

Speaker 2

These applications have unit assembly challenge, which our competitive system support well and have triggered the interest of multiple new customers. Today, we are engaged with 7 different customers We are critically supporting this emerging silicon photonics opportunity and remain well positioned for future growth. Yesterday evening, we announced winning the 1st in a series of expected order to support customers' aggressive silicon photonics capacity expansion. The momentum and the interest for our current solution is very high. These recent wins serve to highlight our incumbent position and the technical leadership in this emerging silicon photonics and the core package optics market.

Speaker 2

In addition to machine learning and the network infrastructures, the AI trend will continue demanding higher complexity and higher volume production of device on the edge, such as camera, sensing, connectivity and the logic based application, which are deployed in power efficient mobile, IoT and other client facing applications. These applications will continue to leverage used in both connectivity shielding and the power efficient stack DRAM. Over the coming years, Both which and the thermal completion operation very well to directly support these 3 AI trends. More complex assembly requirements are increasing the value of our market leading board, rich and dedicated advanced packaging portfolio. Despite the gradual industry recovery, customer interest for qualification and the evaluation remain very strong.

Speaker 2

In addition to AI, we continue to make progress on our advanced display opportunity, supporting advanced backlighting and the future direct initiative display. As mini and the microLED wafer production costs improve and the die size continue to shrink, End market use case will grow and the efficiency and the capability of assembly will also increase. Our dedicated high throughput, high accuracy Luminex system is well positioned to support this upcoming market need. Additionally, we continue to execute on Project W and expect to provide additional visibility into Project W's outlook over the coming quarters. Finally, the integration of our new Dispense business continued to proceed very well with key engagement across our extensive customer network.

Speaker 2

Market feedback on this new solution from multiple leading customers has been very promising. Our microdispense solutions are extremely efficient, capable and accurate, which added significant value for clinical applications, supporting advanced display, battery, medical and sensing trend. The market opportunity for dispense are broad, and I will provide more specifics on our target application and evaluation over the coming quarters. Looking into fiscal 2024, we continue to anticipate a return to above average semiconductor unit growth and also anticipate taking share in the new market. We have very strong customer interest and momentum across our emerging portfolio, Have already seen clear cyclical improvement in our core market and look forward to releasing a steady pace of new system, New feature and also announcing a new customer and the technology win over the coming quarters.

Speaker 2

With that said, I will now turn the call over to Lester, who will discuss our financial performance and outlook. Lester?

Speaker 3

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. While the business environment remains challenging for the entire industry, It remains a very exciting time for the company with clear signs of improvement within our core market and ongoing progress within our emerging opportunities supporting long term technology transitions, which address AI, battery assembly, defense and advanced display. During the September quarter, we generated $202,300,000 of revenue, 47.4 percent gross margin and $0.51 of non GAAP EPS. Gross margins came in slightly softer than expectations, largely due to product mix.

Speaker 3

Non GAAP operating expenses came in just below $70,000,000 in line with our prior expectations. Finally, Tax came in slightly better than expectations due to favorable jurisdictional mix and discrete items. We continue to target the long term 20 Effective tax rate, although anticipate coming in slightly above this level in December. Turning to the balance sheet. Working capital days decreased from 465 to 4 48 days in the September quarter, primarily due to the sequential revenue improvements.

Speaker 3

Our repurchase program remained opportunistic, and we have increased our repurchase activity sequentially to $9,200,000 during the September quarter. As Susan mentioned, we have also increased our dividend payout, maintaining a very competitive dividend yield. This growing and consistent dividend commitment highlights the confidence in our long term outlook. Combined with the ongoing reduction in share count Due to our opportunistic repurchase program, our dividend program provides additional long term value to shareholders. Looking ahead to the December quarter, we anticipate revenue of approximately $170,000,000 plus or minus $10,000,000 with gross margin of 47%.

Speaker 3

Non GAAP operating expenses are anticipated to increase slightly to 71,000,000 plus or minus 2%. We remain focused on controlling and limiting non critical activities, although continue to ramp headcount to support our growing set of customer engagements. Non GAAP net income for the December quarter is expected to be approximately $14,200,000 with non GAAP earnings per diluted share of approximately $0.25 In closing, we are uniquely positioned to capitalize on the growing value of semiconductor and display assembly. Our market access is steadily expanding and we are positioned well to support and enable major long term technology trends for the industry. As our core business gradually improves and increases in the complexity, we remain focused on expanding our access to positive long term advanced packaging, advanced display, automotive and dispense needs.

Speaker 3

We look forward to sharing our progress over the coming quarters. This concludes our prepared comments. Operator, please open the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first questions come from the line of Krish Shanker with TD Cowen. Please proceed with your questions.

Speaker 4

Yes. Hi. Thanks for taking my question. I actually had 3 of them. First one, Susan, when I look at The commentary into the March quarter and beyond, is it fair to assume you think the worst of the ball bonder Bottom is behind us and what kind of visibility do you have and conviction on why it should continue improving?

Speaker 2

Okay. So, basically you asked why we feel bow bound in second half It's high, is that right?

Speaker 4

Yes, yes. Why you think the worst is behind us?

Speaker 2

Okay. So I think there are a few reasons. One is of course customers' feedback. And Also historically, we are second half actually higher than the first half. And the industry actually went So we feel like it should grow.

Speaker 2

And also the recent Actually forecast from IDC and the Gartner, they all point to a strong CY of the 24. So especially I think we see all set order, although I think we believe that they will even order more 2nd half. A lot actually we are quite close to our customers. So I hope I answered your questions.

Speaker 5

Got it, got it.

Speaker 4

That's very helpful, Fusen. And then just wanted to follow-up on some of the commentary you made on the SBM and GPU applications. Number 1, I'm kind of curious the status of your thermal compression bonder eval at 1 of the large Taiwan foundries. And second, do you expect some today many of the GPUs for AI are using COVOS. Do you see them migrating to TCB in the future?

Speaker 2

Yes. Okay. So Krish, we are actually quite excited about prospect of OTCB. So look at the year 20, our revenue is a single digit. I'm sorry, I think 2020.

Speaker 2

And actually 2023, actually we reached to $64,000,000 And we expect our TCB would be over $100,000,000 in 2025. So when we are in 2025 for TCB, the whole dedicated AP actually will be over 200. So the progress has been very good, backed up by strong technology. So currently, I think we have multiple engagement with OSAT, with IDM and also with Foundry. And each company might also have multiple projects and the engagement in the past 2 quarters are even more.

Speaker 2

So According to your questions, we as a company you asked, currently as we have engagement In both the C2W and C2S, so very strong solution, which is extendable to Fine Pitch. The feedback has been good and we hope to finish all qualification in the next few months. So I hope I answered your question. So Next question is AI, GPU and HBM. Actually, it also require The TCB is the top 2 mega integration.

Speaker 2

So the tool actually support multiple application And AI, the measure you mentioned is one of them. So I hope I answered all your questions.

Speaker 4

Thanks for that, Susan. Yes, that is very helpful. And then maybe a quick follow-up for Lester. Can you give some color on how much the backlog was and how much was China So, personally, your total sales?

Speaker 3

Hi, Krish. Thanks for the question. The backlog was $423,000,000 at the end of Q4. And then as far as China is concerned, you're talking about How much was China revenue?

Speaker 4

Yes. That's right. Yes.

Speaker 3

So for Q4, China revenue was 49%, but 46% of those are China headquarters, so not MNCs. And for the year actually, China headquarters actually dropped down to about 40% for FY 23. In FY 2024, it was actually closer to 46%.

Speaker 4

Got it. Thank you very much, Luca. Thank you.

Speaker 2

Okay. Thank you, Krish.

Operator

Thank you. Our next questions come from the line of Dave Dooley with Steelhead Securities. Please proceed with your questions. Dave, could you please check if you're self muted?

Speaker 5

Yes. Thank you. I was muted. Could you just talk a little bit about the general semi business recovery that you saw? How much that grew sequentially?

Speaker 5

What you would expect It's due in the following couple of quarters. And then as a follow on, I think you mentioned that one of the IDC was forecasting strong unit volume growth in 2024. Could you talk about what sort of forecast you're expecting for unit volume growth in 2024?

Speaker 2

Okay. So talk about the quarter business expectation as you ask. So, Deborah, as you know, we actually second half historically is stronger than the first half. So this means the seasonality will happen, the transition from second half to first half. So that caused seasonality from September to December quarters.

Speaker 2

And the average sequential revenue change from September quarter to December, the average historically is 13%. So our Q1 FY 'twenty four guidance Actually, it's in line with our historical EBITDA. So that's Q1. So Q2 from all Our current view and the customers' feedback, we will see sequential growth. And in terms of second half, currently we have actually ongoing intensive and Very intensive qualification with our customer on AP, advanced display and very, very strong feedback on dispensing And coupled with a broader bond business recovery, I think, which I think Chris just asked.

Speaker 2

Media IDC. IDC actually forecasts 20% semiconductor growth. This just came out recently. The Gartner, the unit actually is very, very Hi. But I think average is about 6%.

Speaker 2

The forecast I think is close to 10%. But even with 7%, a little bit higher than historical. I think it will be very, very good for us. As I mentioned, I think industry inventory write down has been many, many times. Coupled with the clearness, I think historically our second half revenue It's a 60% compared to 1st half of 40%.

Speaker 2

And also with the unique momentum in many, many qualification AP advanced Yes, Brent. I think we'll set up stronger second half just for Kness. So I hope I answered your question. Maybe Lester, you want to add a little bit more.

Speaker 3

Yes. Hi, Dave. So you're right. General Semi revenues did increase 50% quarter on quarter. And I think as you know, General Assembly is always our biggest end market segment.

Speaker 3

It accounts for between 50% to 70% of our revenues. I think another point to pick up is utilization rates. So General Semi has been below 70 for Couple of quarters now, but in the last quarter, it's broken 70%. We think it's actually going to continue to rise. Actually, overall utilization has increased 10% from the beginning of FY 'twenty three to Q4.

Speaker 3

So those are all signs pointing out towards a much stronger FY 'twenty four, particularly In the second half, as Lucinda said.

Speaker 5

Okay. And then a follow-up question for me is, I guess 2 of them. Could you just elaborate a little bit more about this New battery assembly order you got, I think you mentioned it was 125 systems or units. Just talk a little bit more in greater detail about What that is about and the delivery schedules there? And then, Lester, I don't know if the new buyer bonders you mentioned Your press release are the ones that address the new general semi bucket.

Speaker 5

I was just curious about the update for that particular wire bond or when is that kind of higher margin product going to ramp and hit market?

Speaker 2

So

Speaker 3

for the battery assembly equipment, We see that coming into Q2 and Q3 of our year. It's one of our traditional customers who haven't bought for a while, but now is back into the market again. So we're very, very happy to see that. As far as The new products is PowerNEXT and PowerCalm. They have been introduced.

Speaker 3

Those are ball bonders that serve the high end or mid end general semi Market, those should become more meaningful in Q3 and Q4 as they qualify and deploy and that should be accretive to our gross margins.

Speaker 2

Thank you.

Operator

Thank you. Our next questions come from the line of Tom Diffely with D. A. Davidson. Please proceed with your questions.

Speaker 6

Yes, good morning. So you talked a little bit about some tech advances for the Luminex. What about the market update? What are you seeing right there in that marketplace for those tools?

Speaker 2

Okay. So let me say this. I think we introduced a very successful product, PISOLAT, very successful. But in the meantime, we also understand industry really have a higher productivity of technology. So In the 'twenty three, we focus on 2 technology.

Speaker 2

1 is Luminex. This is a laser transfer, can be multiplex Speed higher than the Psilox and so is Project W. So Luminex, I think at this moment, in the prior I described many of outstanding technical milestone has been achieved. So what we are right now is that we have multiple engage with customer, but very, very focused just with one leading customer To complete all the high volume production, high volume production qualification by Q2, let me say, is our end of March. So therefore, I think Q3 they can go to production.

Speaker 2

So we are very, very excited. I think The mini microLED, the size will continue to go down and the industry need to have a high productivity tool. Currently, I think still large size is supported by bibounder type of Low end technology, we believe the transition is going to come for next 1 or 2 generation. So again, I think we hope to bring 1 major customer to high volume production and finish all the qualification Together with them, they can go to production in Q3. So also maybe update a little bit about the Project W.

Speaker 2

This year, 2024, we are delivering initial production to as well as preparing For the ramp production during 'twenty four. And actually, we are quite optimistic with these two technology. Move forward, I think we will see growth. This year we hope target for $15,000,000 Together for these 2 technology and 25 we believe can do even much higher than that. So Tom, I hope I can answer your questions.

Speaker 6

Yes. No, I appreciate the extra color on the marketplace. Fusen, you also obviously acquired a Dispensing company a few quarters ago, maybe just a quick update on how that integration is going and if you're able to expand the customer base for that product?

Speaker 2

Okay. You mean dispensing, right? So actually, we are very, very excited. I think dispensing is a very, very huge market. I cover multiple industry, right?

Speaker 2

And the AV customer of KNS More bound customer, they all have a need. So it's easy for us to actually penetrate into a customer. We are focused with a few customers and do a demonstration. The dispensing right now reached to a critical stage Need, we call micro dispensing, need to be very precise, be very accurate with the right amount And has become a bottleneck for many, many customers. And we focus on a few major ones.

Speaker 2

The feedback has very, very strong, right. So we are very I think we will see initial success maybe mid of 'twenty four And we do believe we can grow this product to much higher revenue in the next couple of years.

Speaker 6

Great. And then final question. You talked a little bit about increasing headcount. Any sense on the magnitude of that?

Speaker 3

Well, I think we said we would increase headcount in critical areas, which particularly has to do with The R and D projects that we talked a little bit about the growth initiatives that will pay off in the mid to long term. We are very careful on all costs, including headcount, for all other functions, given the little bit uncertainty. So, we're not looking to

Operator

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Joe Elgindy for any closing remarks.

Speaker 1

Thank you, Daryl, and thank you all for joining today's call. Over the coming months, we will be presenting at investor conferences in Arizona and New York.

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Key Takeaways

  • Q4 results: Revenue of $202.3 M, net income of $23.4 M and non-GAAP EPS of $0.51, with a 47.4% gross margin.
  • General semiconductor revenue rose 50% sequentially, and management expects a modest March-quarter uptick followed by a stronger second-half recovery.
  • Deepening AI engagement with ramping thermal compression bonders for HBM/GPUs and new orders in silicon photonics assembly, signaling market share gains in advanced packaging and networking.
  • Awarded a 120-unit battery assembly system order for EV battery production, primarily to be recognized in the March quarter of FY 2024.
  • Q1 FY 2024 guidance calls for ~$170 M revenue (±$10 M), 47% gross margin and ~$0.25 non-GAAP EPS, reflecting typical seasonality.
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Earnings Conference Call
Kulicke and Soffa Industries Q4 2023
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