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Edited Transcript of KLIC earnings conference call or presentation 2-May-19 10:00pm GMT

Q2 2019 Kulicke and Soffa Industries Inc Earnings Call

May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Kulicke and Soffa Industries Inc earnings conference call or presentation Thursday, May 2, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fusen Chen

Kulicke and Soffa Industries, Inc. - President, CEO & Director

* Joseph Elgindy

Kulicke and Soffa Industries, Inc. - Director of IR & Strategic Planning

* Lester A. Wong

Kulicke and Soffa Industries, Inc. - CFO & General Counsel

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Conference Call Participants

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* Christian David Schwab

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* David Duley

Steelhead Securities LLC - Managing Principal

* Peter Peng

B. Riley FBR, Inc., Research Division - Associate Analyst

* Krish Sankar

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Kulicke & Soffa 2019 Second Fiscal Quarter Results Call (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Elgindy, Senior Director, Investor Relations and Strategic Initiatives for Kulicke & Soffa. Joseph, you may begin.

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Joseph Elgindy, Kulicke and Soffa Industries, Inc. - Director of IR & Strategic Planning [2]

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Welcome, everyone, to Kulicke & Soffa's Second Quarter Fiscal 2019 Conference Call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer; and Lester Wong, Chief Financial Officer and General Counsel.

For those of you who have not received a copy of today's results, the release as well as the latest investor presentation are both available in the Investor Relations section of our website at investor.kns.com.

In addition to historical statements, today's remarks will contain statements relating to future events and/or future results. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements.

For a complete discussion of the risks associated with Kulicke & 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 29, 2018.

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

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [3]

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Thank you, Joe. Despite the current industry conditions, our global organization continues to be increasingly focused on cost control while we also prioritize our ongoing business development process and efforts to drive fundamental business optimization.

We continue to be cautiously optimistic and believe the current demand environment has stabilized. Customer sentiment and our checks on field-utilization rates have both improved through the quarter. From our view, excess capacity is being digested, and we believe one of the key factors contributing to this lower level of capital intensity is the uncertainty surrounding global trade. Despite the lack of resolution on U.S.-China trade, there continued to be positive micro, macro and company-specific drivers that provide a solid foundation for long-term growth.

Macro conditions such as strong global employment, a strong U.S. economy, ongoing global expansion and fiscal stimulus programs in major consumer markets are anticipated to positively impact global semiconductor consumption.

From a micro-industry standpoint, again, we see improving trends such a slight pickup in both utilization rates for the field capacity of wire bonders, and we also experienced a slight pickup in our shipments late in the March quarter. Also, major trends such as 5G and IoT are anticipated to be key drivers supporting higher levels of semiconductor unit growth. We continue to anticipate the 5G transition will help reinvigorate the premium smartphone market, drive demand for infrastructure build-outs and broaden adoption of new, low-cost end devices. We expect our core market-leading products will benefit from this evolving transition.

Finally, from a company-specific standpoint, we continue to make meaningful progress on several key growth initiatives. We are increasingly positioned to drive operating leverage as we optimize our business and enter new markets. These efforts are focused on 4 specific areas: enhancing market share in Aftermarket Products and Services; improving gross margins for high-volume equipment; providing new market access to emerging Mini-LED; and also participating in the fundamental technology transitions of new advanced packaging approaches. The entire K&S organization remains extremely committed to executing toward this multi-pronged initiative.

Considering this longer-term view, we also maintain our commitment to delivering value to shareholders. During the March quarter alone, we have returned approximately $35 million to shareholders through both our dividend and share repurchase programs. This is well in excess of our long-term free cash flow target.

I will provide some additional details on the progress of our new business initiatives shortly, but first a brief review on the March quarter. We were able to achieve our revenue guidance range and now anticipate a modest progression toward industry recovery. During the March quarter, we experienced a sequential reduction within general semiconductor, LED, memory and automotive. We also experienced a slight increase in our advanced packaging offerings driven by ongoing customer interest of our expanding and the competitive advanced packaging portfolio. We booked $115.9 million of revenue, gross margin of nearly 48% and generated profit on a non-GAAP basis.

Despite the current market dynamics, we are pleased with our current operating model as we continue to optimize our business and invest heavily in new development. This current operating model provides significant through-cycle cash flow generation and supports aggressive R&D investment.

We are committed to further enhancing this performance as we execute on our longer-term goals. The sequential revenue reduction in March quarters was most pronounced within our capital equipment segment, which decreased by 35% while our APS business declined by 14%. Within capital equipment, wire bonding reduced by 47% and the wedge bonding reduced by 16% sequentially. Several of our advanced packaging tools, APAMA, thermal compression bonder, iStack die attach tool and also our System-in-Package hybrid flip chip tool all increased on a sequential basis.

I would now like to turn the call over to Lester Wong who will cover this quarter's financial overview in greater details. Lester?

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Lester A. Wong, Kulicke and Soffa Industries, Inc. - CFO & General Counsel [4]

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Thank you, Fusen. My remarks today will refer to GAAP results unless noted. Net revenue for the quarter was $115.9 million; gross margin of 47.9%; generated $55.6 million of gross profit. We anticipate gross margins to be just above 45% in the June quarter.

Our strong March quarter gross margins were due in part to product mix and also a release of a costing provision and were facilitated through the flexibility of our operations. As discussed in the past, our flexible equipment integration approach, which leverages our supply chain relationship and a mix of temporary headcount, allows for a lower level of fixed cost, providing more consistent through-cycle gross margin performance.

We continue to benefit from the flexibility of our manufacturing operations, and we're able to also drive efficiencies within SG&A through the March quarter. We are all very focused on limiting controllable and discretionary costs and driving workforce efficiency. This cost containment exercise is extremely selective, and we do not intend to jeopardize our long-term growth initiatives.

Compared to the March quarter 1 year ago, we have reduced our global workforce by over 16% while increasing resources allocated to ongoing development initiatives. In the long term, we plan on maintaining our existing operating expense target of $53 million of fixed quarterly expense plus 5% to 7% of variable quarterly expense tied to revenue. Due to our aggressive focus on controllable and discretionary spending, we are targeting to achieve the lower range of our variable expense over the remaining quarters of fiscal 2019.

We booked a net tax expense of $4.7 million in the March quarter, which included several discrete items including a $2.5 million expense related to the final regulation of the transition tax calculation associated with the Tax Cuts and Jobs Act of 2017. These additional regulations were issued by the IRS in February of 2019.

Going forward, we continue to maintain a long-term effective tax rate target of around 15%, although anticipate the effective tax rate in the June quarter to be above this long-term target due to jurisdictional income mix and lower overall profitability.

Turning to the balance sheet. We ended the March quarter with a total cash and investment position of $627.3 million or $9.52 on a per share basis. During the quarter, we have increased our repurchase activity and deployed $26.9 million repurchasing 1.2 million shares. At the end of our March quarter, we had approximately $145.3 million remaining under the existing share repurchase authorization.

We continue to take a long-term and prudent approach to shareholders return and have recently entered into a credit facility which provides additional flexibility supporting our regional cash needs. On a book value per share basis, we closed the March quarter with $12.49, a decrease of $0.33 from the December quarter. Working capital, defined as accounts receivable plus inventory less accounts payable, decreased by $42.5 million to $208 million.

From a DSO perspective, our day sales outstanding increased from 107 days to 108 days. Our day sales of inventory increased from 120 days to 153 days and our days of accounts payable decreased from 51 days to 50 days.

This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the June quarter business outlook.

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [5]

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Thanks, Lester. While the near-term environment continues to be challenging, we remain optimistic, when we look further out given the macro and the micro trends such as strong global employment, ongoing stimulus program in major consumer markets, improving utilization rate for our equipment and the key trends directly impacting demand for our core product such as 5G, IoT, automotive and solid-state memory.

Unique to our business, we are also very excited with our new business prospects and the customer traction within our growing advanced packaging portfolio. Our Mini-LED solution, in addition to our fundamental optimization plans.

As mentioned in today's press release, we believe that soft demand environment has stabilized and expect revenue to be approximately $120 million to $140 million, representing a 12% sequential improvement. Looking further out, our new and core products are aligned with several significant transitions in our space.

First, our core ball and wedge bonding offerings, where we have a leadership position, are well-positioned to benefit from the industry recovery and also long-term fundamental semiconductor unit demand driven by electric and autonomous vehicles, the 5G transition, Internet of Things and the solid-state memory. We continue to anticipate these significant trends will support a higher-than-average semiconductor unit growth rate over the coming years.

Second, our multi-pronged efforts surrounding the advanced packaging are also gaining traction. There continues to be increasing interest and adoption of new packaging techniques in both high-end memory and logic applications supporting cloud, artificial intelligence and also consumer electronics. In March quarters, we recognized revenue on several APAMA Thermo-Compression tools supporting advanced and high-volume logic production as a major OSAT. We also continued customer evaluations of our Katalyst, high-accuracy flip-chip tool with major customers. We are pleased with the performance of Katalyst, which is extremely competitive in both accuracy and the throughput among all leading flip-chip solutions in the market. Separately, I am happy to report we have shipped the LITEQ 500 lithography tool to a high-potential, high-volume commercial customer for evaluation.

Finally, we continue to make meaningful progress on our Mini-LED and plan on shipping multiple tools over the coming months. Considering the extreme speed of this tool which is up to 5x faster than typical pick-and-place tools, it has significant potential to enable high-volume adoption of this emerging Mini-LED packaging technology.

We look forward to updating you on the progress and the customer acceptance of this tool. Again the entire organization remains extremely focused and continues to make progress toward this multifaceted business strategy. We intend to create significant investor value by executing on this business initiative and continuing to take a long-term and prudent approach to capital allocations.

Our strong balance sheet, expanding portfolio, dominant share positions and high potential customer engagement provide us with increasing confidence that we will exit this soft demand environment with enhanced fundamental strength and growth prospects.

This concludes our prepared remarks. Operator, we will now be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Christian Schwab with Craig-Hallum Capital Group.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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I was just wondering, Fusen, to the bigger picture, as we finally have business stabilizing, business up on a sequential basis. As you begin to think about the second half of the year kind of from the run rate in June, would you expect sequential growth to continue? Or for business to kind of stabilize at that level?

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [3]

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Okay. So, Christian, compared to say 3 months ago, we see signs of positive directions. Like the field utilization rate is actually going up. And we also see some OSAT companies starting to think about adding additional capacity. In fact, we as an OSAT company, already start to add small capacity. The industry also expects memory to reach big growth by the end of the year. So we see here and there a positive sign. And we believe we are at a trough and we already see about 12% growth for next quarters. I think this really is still not clear enough but we are hopeful. The strength of our visibility I think in a few months, we should be able to judge it. But actually, we feel quite positive from here.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Great. And then if I may just one more question, bigger picture, looking beyond this year. Previously you guys put out some strong objectives in 2021 for revenue to kind of get to that $1.1 billion to $1.2 billion and operating margins of 24% to 27% which from current run rates of business seems kind of heroic. Is that something that you still think is roughly attainable? Or do you think that's been pushed out a year? If you could just give us an update on kind of your long-term financial targets as well that would be great.

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [5]

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Sure. Thank you, Christian, for the questions. So we proposed a 3-year model in July 2018, and when we're back actually it was at the table of cycle. Then we know semiconductor memory cycle as well as U.S.-China trade tension. So at this moment, I believe we are in a stabilized place and that we are on our way for recovery. So to answer your question, whether we can achieve $1.2 billion revenue goal by 2021, actually it depends a lot on the strength of this industry recovery.

So I would state in 2017 actually we grew 30% compared to 2016. So if we can see that utilization rate close to 80%, somewhere say in second half of 2019, then we might have a strong 2020 and 2021. Coupled with the gross contribution from our new product introduction in advanced packaging, Mini-LED and the APS which has yet to generate any significant revenue, then I believe we still have a chance to achieve $1.2 billion by 2021. But if the recovery rate is somewhat slower then we might take -- we might need to take additional year to achieve $1.2 billion in 2022.

But let me answer your question may be from a different angle. In 2018, we generated $171 million cash from operations. So hopefully by 2020, our earnings power will expand, and the contribution will come from what I just mentioned, advanced packaging, Mini-LED and the APS which has yet to generate significant revenue. And then in 2018, our share count was 69 million shares, and our current share count is around 66 million shares. So for sure by 2021, our share count will be below 66 million shares. So the current remaining authorized amount share repurchase plan is $140 million, with this amount is capable to repurchase additional 6 million shares at the current stock price. So what I try to say is whether we will achieve $1.2 billion revenue in 2021 or 2022, we believe we can deliver significant shareholder value to our investors in the coming years.

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Operator [6]

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Our next question comes from the line of Krish Sankar with Cowen and Company.

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Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [7]

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A couple of them, first on the March quarter, Fusen or Lester, can you say how much was auto and advanced packaging as a percent of your revenues?

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Lester A. Wong, Kulicke and Soffa Industries, Inc. - CFO & General Counsel [8]

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So auto, we combine auto and industrial together. So auto industrial is about 27% and advanced packaging is about 20% or so.

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Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [9]

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Got it. Got it. Okay. And then when you look into June, it's nice to see the revenue grew but it looks like that sequential growth rate is not -- is below what your typical seasonality or what you'd quantify that is. So is the weakness in June primarily auto related? Or are you seeing pockets of other weaknesses too?

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [10]

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So Krish, I think the increment for the June quarter is positive return, albeit in general semiconductor. I think people just fear like it's a trough and U.S.-China trade tension is not fully resolved yet. I think people believe, in general, second half will have a better business. So I would say it's a recovery in some semiconductor, general semiconductor unit growth.

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Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [11]

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Got it. Got it. All right. That's helpful. And then, Lester, just quickly, I remember last time, in the last call, you kind of highlighted that you're -- probably you're breakeven revenues, I think it was like $120 million or something like that. So is this still the case? Or is it gone below that?

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Lester A. Wong, Kulicke and Soffa Industries, Inc. - CFO & General Counsel [12]

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It's around that neighborhood, $120 million to $125 million or so.

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Krish Sankar, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [13]

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So it's $120 million to $125 million. Okay. All right. And then last question, Fusen, obviously, given your short lead into the wire bonder side and you saw some pickup in mobile post-Chinese New Year. Have you guys seen any of your OSAT customers talk about improvement post-Chinese New Year besides just utilization rate trends or have they come to buy back tools? So where you think where are we in that purchasing pattern?

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [14]

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Okay. I think generally, our company including OSAT -- our customers including OSAT they added capacity and also replacement along 80% utilization. And right now, the rate is around mid-70%. So we already see some selective customers and start to working with us and take some -- very few and start to add a small amount of capacity. And -- so I don't know if I answered your questions. Though, in general, I think utilization rate is going up and the capacity updating is following mobile in a module.

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Operator [15]

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Our next question comes from the line of David Duley with Steelhead Securities.

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David Duley, Steelhead Securities LLC - Managing Principal [16]

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I had a few. I guess you just mentioned the utilization rates. Was that your wire bonder utilization rates were running in the mid-70% range, is that what you just said?

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [17]

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Yes. That's correct.

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David Duley, Steelhead Securities LLC - Managing Principal [18]

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Okay. And you mentioned that around 80% is typically when you see people start to reorder in a more significant way.

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [19]

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Yes, historically.

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David Duley, Steelhead Securities LLC - Managing Principal [20]

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Okay. Now a little bit of a hypothetical here is your -- the largest founder TSMC is talking about what I would call a significant second half recovery in overall volumes, both advanced nodes and other nodes as well. I think it's up 35% in the second half versus the first half. If -- and they're pretty broad player of units. If they are able to achieve that sort of growth in the second half of the year, do you think that would trigger the OSATs to come back in and order more significantly? Or will they be able to get by without ordering a lot of tools?

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [21]

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Okay. So if you look at total devices produced, a trillion devices per year, majority are actually usable under SOA due to the packaging. So advanced packaging I think at this moment, the market shares -- now total market shares for packaging I think is still low. So the company you just mentioned, will have significant revenue growth. If this comes from general, including higher technology nodes, then my answer is yes. I think this will not trigger or this is indication that a broader recovery is taking place. But if it is just (inaudible) of advanced packaging, the answer might not be very helpful. I don't know if I answered your questions.

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David Duley, Steelhead Securities LLC - Managing Principal [22]

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Yes. Well, it's hypothetical so that's a good answer. As far as -- you mentioned that advanced packaging was I think 20% of revenue. Is that just the new tools, the 3 tools that you're referring to? Or is that includes advanced packaging, wire bonders that are classified as advanced in the advanced packaging bucket?

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [23]

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Okay. So actually this is including all our advanced packaging we mentioned, some go to the TCB and of course, our 3-chip is yet to generate any revenue. And our stud bump and our hybrid tool and of course, we also count in advanced memory. So advanced memory included is nodes over 20%.

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David Duley, Steelhead Securities LLC - Managing Principal [24]

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Okay. And the sequential growth that you're going to see in the June quarter, just as a follow-on question I think to someone else's there. Did you say the sequential growth was driven by a broad -- whatever you do expect to improve sequentially in the June quarter?

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [25]

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Well. Actually, we see -- of course, at this moment memory alone is somewhat positive. There's still some inventory capacity needed to be purchased. But I think by end of the year, the big growth will start to resume. So memory actually as it is somewhat still a little bit weak, low single prospect and always some (inaudible) for memory market. So memory is still weak. I think LED is a little bit positive and probably I think the mobility contribute a lot at this early stage.

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David Duley, Steelhead Securities LLC - Managing Principal [26]

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Okay. Final thing for me is, you mentioned I think that you shift a lithography tool for advanced packaging. Do you have greater detail about what's going on there?

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Fusen Chen, Kulicke and Soffa Industries, Inc. - President, CEO & Director [27]

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Okay. We have acquisition back 3 years ago, and this is a differentiated tool compared to our competitor. They use tungsten lens and we use a laser lens, so productivity actually is much higher. And it took a while for us to actually position this tool to a major customer because when customers need to take this tool they need to change a lot of infrastructure. So finally, I think the tool has been shipped and started to work in our customer site and we are quite excited about it.

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Operator [28]

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(Operator Instructions) Our next question comes from the line of Craig Ellis with B. Riley FBR.

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [29]

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This is actually Peter Peng calling in for Craig Ellis. On the March result, the gross margins outperformed, can you talk about the variance in the gross margin line?

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Lester A. Wong, Kulicke and Soffa Industries, Inc. - CFO & General Counsel [30]

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Yes. So Peter, as you know in softer quarters, our gross margins tend to go up because our wedge bonder, our APMR and our APS business have much higher margins than our ball bonder business. And even with ball bonder, obviously, our highest in count tools have better margins than LED tools. So a large part of the margin variance is due to the product mix.

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [31]

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Great. And then for the June guidance, the 12% Q-on-Q growth, is that pretty split among the traditional wedge bonding, advanced packaging aftermarket service? Or are there certain areas that's more stronger?

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Lester A. Wong, Kulicke and Soffa Industries, Inc. - CFO & General Counsel [32]

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I think a lot of the growth will be coming from ball bonder. Ball bonder was particularly weak in the last couple of quarters. As Fusen mentioned in his earlier remarks, we're beginning to see a recovery in that by general semi as well as mobility devices and a little bit by LED. So I think ball bonder would be the one that will be leading to growth.

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Peter Peng, B. Riley FBR, Inc., Research Division - Associate Analyst [33]

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Okay. Great. And one more question for me is, on the buyback, good job on the execution. Is this a trend that we can see sustaining for the next few quarters? Or at some point, is it going to taper off a little bit?

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Lester A. Wong, Kulicke and Soffa Industries, Inc. - CFO & General Counsel [34]

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Well. We cautiously review our capital allocation policy. But just as a point of reference, Peter, over the last 12 months, we repurchased approximately $125 million worth of shares and paid out $24 million in dividends. That represents like 110% of our free cash flow over the same period. So that's well above the 50% free cash flow allowing that we talked about at Analyst Day.

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Operator [35]

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There are no further questions in queue at this time. I would like to turn the floor back over to Joseph Elgindy for closing comments.

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Joseph Elgindy, Kulicke and Soffa Industries, Inc. - Director of IR & Strategic Planning [36]

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Thank you, Raya. Before closing, I wanted to inform investors that we will be participating in several upcoming conferences and road shows through the June quarter, including the 20th Annual B. Riley FBR conference in Beverly Hills; Cowen and Company's 46th Annual TNT Conference in New York City; the Baird Consumer Tech Conference also in New York City; the Stifel 2019 Cross Sector Insights Conference in Boston; and finally the 11th Annual CEO Investor Summit in San Francisco. Thank you all for the time. As always, please feel free to follow up directly with any additional questions. Raya, this concludes our call. Good day.

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Operator [37]

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This concludes our conference call for today. Please disconnect your lines at this time, and have a wonderful day.