Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) Q4 2023 Earnings Call Transcript

Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) Q4 2023 Earnings Call Transcript November 16, 2023

Operator: Greetings and welcome to the Kulicke & Soffa Fourth 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 would like to turn the call over to Joe Elgindy, Senior Director, Investor Relations. Thank you. You may begin.

Joseph Elgindy: Thank you. Welcome, everyone, to Kulicke & Soffa’s fiscal fourth quarter 2023 conference call. Fusen Chen, President and Chief Executive Officer; and Lester Wong, Chief Financial Officer, are also joining on today’s call. Non-GAAP financial measures referenced 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.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 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 & Soffa, that could affect our future results and financial condition, please refer to our recent and upcoming SEC filings, specifically the 10-K for the year ended September 30, 2023, and the 8-K filed yesterday. With that said, I will now turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.

Fusen Chen: Thank you, Joe. Before discussing our business performance, I want 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 capillary products. Our teams based in our Haifa facility have delivered meaningful innovations and leading products over the years and we are pleased to report that they are not in a high-risk area; however, we continue to hope for a quick and peaceful resolution. As a global company with a diverse employee and customer base, we are committed to strengthening our diversity and inclusion initiatives to foster collaboration, mitigate inherent biases, and create growth opportunities.

Earlier this week, we successfully hosted our inaugural Elevating Women in Engineering and Tech Summit in Philadelphia. This well attended event, featured several keynote speakers from K&S, as well as esteemed members from the external community. We’re grateful to be able to host these types of events which stand as a testament to our dedication to enabling change and exercising leadership within our local communities. Turning to the business, we have seen clear sequential improvements in key markets, although broader market recovery will be gradual. We anticipate the sequential change into the December quarter being largely seasonal, and in line with our long term average. Furthermore, based on discussions with customers, external forecasts and gradually improving utilization data, we anticipate a moderate demand improvement into the March quarter and stronger second-half driven recovery.

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Q&A Session

Since our prior March quarter, we have seen significant improvements in the general semiconductor end market and some recovery within LED. At the same time, automotive and memory continue to be soft near-term. Regardless of near-term industry conditions, we remain very aligned with major technology transitions and are actively and intensively engaged in qualifications for our advanced packaging, automotive, dispense, and advanced display solutions with multiple industry-leading customers. Coupled with ongoing improvements in the Ball Bonding business, these focused engagements 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 fourth consecutive annual dividend raise, and we continue to maintain the highest dividend yield relative to U.S. industry peers. For the September quarter, we delivered $202.3 million of revenue, $23.4 million of net income and $0.51 of non-GAAP EPS. We continued to see improvements 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 RAPID Series Ball Bonder platform which is best suited for the most complex wire bonding applications. We have also seen a pickup in demand for emerging vertical wire applications increasingly deployed in mobile and IoT-based applications to mitigate RF interference between bands.

We look forward to ongoing technology driven change and improving conditions within this key Ball Bonding market. Separately, we are well positioned to further optimize our high-volume business with the recently introduced POWERCOMM and POWERNEXX platforms. These new systems will provide additional value and margin opportunities as they ramp over the coming year. Within LED, we have also seen sequential improvements in general lighting which we associate with the U.S. incandescent ban that took place this past April. Within advanced display, we continue to make technical progress with the LUMINEX platform and are approaching five 9’s yield and we also continue to execute towards Project W deliverables. For automotive and industrial, macro dynamics including high interest rates have impacted end user demand and also near term industry CapEx needs.

Our automotive and industrial business remains a value-added enabler of battery assembly and power semiconductor applications which are supporting long-term electric vehicle and sustainable energy transitions globally. We have recently accepted an order of 120 battery assembly systems, which will be recognized primarily in the March and June quarters of 2024. Finally, as indicated in last week — in recent weeks, the memory market remains challenging near-term. We currently see improving price dynamics as well as specific technology-driven opportunities within next-generation high-bandwidth memory, an continue to execute on emerging Vertical Fan-Out, or VFO applications. As briefly discussed last quarter VFO is being deployed as an alternative to Through-Silicon-Vias, or TSVs, to assemble low power dynamic RAM in a 3D format.

This cost-effective and flexible VFO approach enables higher-density DDR which supports large and established markets such as power efficient mobile devices and other edge-based applications. We are currently engaged in evaluations with several memory leaders and are well prepared — positioned to support this emerging 3D-based memory architecture. Both emerging HBM and VFO opportunities will add new layers of diversification to our memory portfolio over the long term. Next, I wanted to discuss our participation within broadening artificial intelligence applications and provide brief updates on advanced display and dispense. First on AI. Similar to how PCs, smartphones and connected devices have increased the capacity needs for the industry, artificial intelligence applications are directly creating both unit and technology-based growth opportunities 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. These new positions have all enhanced our ability to support long-term AI trends, which are very much centered on emerging assembly techniques. Considering our growing alignment with key artificial intelligence trends, I would like to outline how we are specifically exposed to what we consider to be the three key building blocks of AI: Machine learning, network infrastructure and devices on the edge. 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 applications and emerging chiplet and heterogeneous-based CPUs. We continue to directly support leading heterogeneous applications with our Thermocompression portfolio and anticipate both high-bandwidth memory and multiple GPU-based applications will begin transitioning to finer and finer pitches, increasing the need for our precision solutions.

As both HBM and GPU-based applications continue to move to finer I/O pitches, we expect our solutions to be increasingly competitive. As we work with several key customers, we continue to believe K&S is a significant enabler to the success of the most leading-edge applications supporting AI. Our tools in both qualification and production are extremely competitive and customer engagements have strengthened over the past 2 quarters. We look forward to sharing more feedback on the current evaluation and qualification status of our key leading-edge logic opportunities over the coming months. Next, as AI becomes more integrated with existing user applications deployed at work, at home, and through the cloud, there is a growing need for higher bandwidth, and more efficient networking solutions.

This need is being met with emerging silicon photonics technology deployed in co-packaged optics devices, which are anticipated to grow at a 66% CAGR through 2033. Currently, our silicon photonics systems are supporting a leading customer’s co-packaged optics production used to support network switching applications. These applications have unique assembly challenges which our competitive systems support well and have triggered the interest of multiple new customers. Today, we are engaged with 7 different customers who are critically supporting this emerging silicon photonics opportunity and remain well positioned for future growth. Yesterday evening, we announced winning the first in a series of expected orders to support a customer’s aggressive silicon photonics capacity expansion.

The momentum and interest for our current solution is very high. This recent win serves to highlight our incumbent position and technical leadership in this emerging silicon photonics and co-packaged optics market. In addition to machine learning and network infrastructures, the AI trend will continue demanding higher complexity and higher volume production of devices on the edge such as cameras, sensing, connectivity, and logic-based applications, which are deployed in power efficient mobile, IoT and other client-facing applications. These applications will continue to leverage proven and cost-effective assembly approaches such as system-in-package applications in which Ball and Wedge Bonding play a dominant role, as well as emerging opportunities for standing wire applications used in both connectivity shielding and power-efficient stacked DRAM.

Over the coming years, Ball, Wedge and Thermocompression are positioned very well to directly support these three AI trends. More complex assembly requirements are increasing the value of our market leading Ball, Wedge and dedicated Advanced Packaging portfolio. Despite the gradual industry recovery, customer interest for qualification and evaluation remains very strong. In addition to AI, we continue to make progress on our advanced display opportunities supporting advanced backlighting and future direct-emissive displays. As mini and micro LED wafer production costs improve and die size continues to shrink, end market use cases will grow and the efficiency and capabilities 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 continues to proceed very well with key engagements across our extensive customer network. Market feedback on these new solutions from multiple-leading customers has been very promising. Our micro dispense solutions are extremely efficient, capable and accurate which adds significant value for critical applications supporting advanced display, battery, medical and sensing trends. The market opportunities for dispense are broad and I will provide more specifics on our targeted applications and evaluations over the coming quarters. Looking into fiscal 2024, we continue to anticipate above-average semiconductor unit growth and also anticipate taking share in new markets.

We have very strong customer interest and momentum across our emerging portfolio, have already seen clear cyclical improvements in our core market and look forward to releasing a steady pace of new systems, new features and also announcing new customer and technology wins over the coming quarters. With that said, I will now turn the call over to Lester who will discuss our financial performance and outlook. Lester?

Lester Wong: 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, dispense and advanced display. During the September quarter, we generated $202.3 million of revenue, 47.4% gross margin and $0.51 of non-GAAP EPS. Gross margins came in slightly softer than expectations, largely due to product mix. Non-GAAP operating expenses came in just below $70 million, 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 448 days in the September quarter, primarily due to the sequential revenue improvement. Our repurchase program remains opportunistic, and we have increased our repurchase activity sequentially to $9.2 million during the September quarter. As Fusen 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 million, plus or minus $10 million with gross margins of 47%. Non-GAAP operating expenses are anticipated to increase slightly to $71 million, 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 $14.2 million dollars 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. We look forward to sharing our progress over the coming quarters. This concludes our prepared comments. Operator, please open the call for questions.

Operator: [Operator Instructions]Our first questions come from the line of Krish Sankar with TD Cowen.

Krish Sankar: Thanks for taking my question. I actually have 3 of them. First one, Fusen, when I look at your 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?

Fusen Chen: Okay. So Krish, you asked why ball bonder in the second half is high. Is that right?

Krish Sankar : Yes. Why you think is the worst is behind us?

Fusen Chen: Okay. So I think there are a few reasons. One is, of course, our customers’ feedback. And also, historically, we have second half actually higher than the first half and the industry actually went through a few inventory digestion. So we feel like it should grow. And also recent actually forecast from IDC and the Gartner, they all point to a strong CY over ’24. So especially, I think we see OSAT order, although I think we believe that they will even order more second half. Actually, we are quite close to our customers. So I hope I answered your questions.

Krish Sankar : Got it. That’s really helpful, Fusen. And then I just wanted to follow up on some of the commentary you made on the HBM and GPU applications. Number one, I’m kind of curious the status of your Thermocompression bonder eval at one of the large Taiwan foundries. And second, do you expect some — today many of the GPUs for AI are using CoWoS, do you see them migrating to TCB in the future?

Fusen Chen: Yes. Okay. So Kris, we are actually quite excited about prospects of our TCB. So look at the year 2000, our revenue is a single digit — I’m sorry, I think, 2020. And actually, 2023, actually, we reached $64 million and we expect our TCB will be over $100 million 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 the foundry. And each company might also have a multiple project and the engagement in the past 2 quarters are even more. So going to your questions, with the company you ask. Currently, actually, 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, right? So I hope I answered your question. So next question is AI, GPU and HBM actually, it also require the TCB at the top 2 mega integration. So the tool actually supports multiple applications. And AI, the measure you mentioned is one of them. So I hope I answered all your questions.

Krish Sankar : Thanks, Fusen. Yes, that was 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 of your total sales?

Lester Wong: Yes. Krish, thanks for the question. The backlog was $423 million at the end of Q4. And then as far as China is concerned, are you talking about how much was China revenue?

Krish Sankar : Yes, that’s right. Yes.

Lester Wong: So for Q4, China revenue was 49%, but 46% those are China headquarters, so not MNCs. And for the year, actually, China headquarters actually dropped down to about 40% for FY ’23. And FY ’24, it was actually closer to 46%.

Operator: [Operator Instructions] Our next questions come from the line of Dave Duley with Steelhead Securities. Dave, could you please check if you are self-muted?

David Duley: 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? What you would expect it to do 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?

Fusen Chen: So talking about the quarter business expectation as you ask, so Dave, 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 last September to December quarters. And average sequential revenue change from our September quarter to December, on average historically is 13%. So our Q1 FY ’24 guidance actually is in line with our historical average. So that’s Q1. So Q2, from all our current view and the customers’ feedback, we will see a sequential growth. And in terms of second half, currently, we have actually ongoing intensive and very intensive qualification with our customer on AP, but advanced display and very, very strong feedback on the dispensing and coupled with a broader ball bonder business recovery, which I think Krish just asked.

Maybe IDC — IDC actually forecasts a 20% semiconductor growth. This just came out recently. At Gartner, the unit actually is very, very high. But I think average is about 6%. 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 K&S, I think historically, our second half revenue is 60% compared to first half of 40%. And also with the unique momentum in many, many qualification AP, advanced display, I think we’ll set up a stronger second half just for K&S. So I hope I answered your question. Maybe, Lester, you want to add a little bit more.

Lester Wong: So you’re right. General semi revenues did increase 50% quarter-on-quarter. And I think, as you know, general semi is always our biggest end market segment. 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 a 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 ’23 to Q4. So those are all signs pointing out towards a much stronger FY ’24, particularly in the second half, as Fusen said.

David Duley: And then a follow-up question for me is — I guess, two 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, don’t know if the new wire bonders you mentioned in your press release are the ones that addressed the new general semi bucket. I was just curious about the update for that particular wire bonder or when is that kind of higher-margin product going to ramp and hit market?

Lester Wong: So 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 market again. So we’re very, very happy to see that. As far as the new products, it’s POWERNEXX and POWERCOMM, they have been introduced. Those are ball bonders that serve the high end or mid-end general semis market. Those should become more meaningful in Q3 and Q4 as they qualify and deploy and then that should be accretive to our gross margins.

Operator: Our next questions come from the line of Tom Diffely with D.A. Davidson.

Tom Diffely : 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?

Fusen Chen: So let me say this. I think we introduced a very successful product, PIXALUX, very successful. But in the meantime, we also understand in industry really we have a higher productivity of technology. So in ’23, we focused on 2 technology: One is LUMINEX. This is a laser transfer can be multiple X speed higher than the PIXALUX, so as Project W. So LUMINEX, I think at this moment — in the prior earnings call, I described many of outstanding technical milestone has been achieved. So what we are right now is, we have a multiple engage with customers, but very, very focused just with one leading customer to complete all the high-volume production qualification by Q2, that means our end of the March. So therefore, I think in Q3, they can go to production, right?

So we are very, very excited. I think the mini, micro LED size will continue to go down and the industry needs to have a high productivity tool. Currently, I think still large die scale supported by wire bonder type of low-end technology. We believe the transition is going to come for the next one or two generations. So again, I think that we hope to bring one major customer to high-volume production and finish all the qualification together with them, they can go to production in Q3. So I’ll also maybe update a little bit about the Project W. This year, ’24, we are delivering initial production tool as well as preparing for the ramp production during ’24. And actually, we are quite optimistic with these two technology. Move forward, I think we will see growth.

This year, we hope — target for $50 million together for these two technology. And ’25, we believe can do even much higher than that. So Tom, I hope I answered your questions.

Tom Diffely : Yes, no. I appreciate the extra color on the marketplace. Fusen, you 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?

Fusen Chen: You mean dispensing right? So actually, we are very, very excited. I think dispensing is a very, very huge market. I cover multiple industries, right? An AD customer of K&S, ball bonder customer, they all have a need. So it’s easy for us to actually pan out through talking to a customer. We are focused with a few customers and to demo — 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. The feedback is very, very strong. So we are very confident. I think we will see initial success, maybe middle of ’24. And we do believe that we can grow this product to much higher revenue in the next couple of years.

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

Lester Wong: Well, I think we said we would increase headcount in critical areas, which particularly has to do with, I think, the R&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 — a little bit uncertainty. So we’re not looking to increase headcount significantly. It’s probably — overall, it’s probably neutral or down a little bit.

Operator: We have reached a question-and-answer session. I would now like to turn the floor back over to Joe Elgindy for any closing remarks.

Joseph Elgindy: Thank you, Darryl, 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. As always, please feel free to follow up directly with any additional questions. This concludes today’s call. Have a great day, everyone.