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Kulicke & Soffa Industries Inc (KLIC) Q2 2019 Earnings Call Transcript

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Kulicke & Soffa Industries Inc  (NASDAQ: KLIC)
Q2 2019 Earnings Call
May. 02, 2019, 6:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Kulicke & Soffa 2019 Second 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. (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.

Joseph Elgindy -- Investor Relations and Strategic Initiatives

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 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 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.

Fusen Chen -- President and Chief Executive Officer

Thank you, Joe. Despite the current industry conditions, all global organizations continue to be increasingly focused on cost control. While we also prioritize our ongoing business development process and effort, to drive fundamental business optimizations, we continue to be cautiously optimistic and believe the current demand environment has stabilized. Customer sentiment and our check on field utilization rates have both improved through the quarter. For all of you, excess capacity is being digested and we believe one of the key factor contributing to this lower level of capital intensity is uncertainty surrounding global trade.

Despite the lack of a resolution on US-China trade, there continue to be positive macro, micro and company-specific drivers that provide a solid foundation for long-term growth. Macro conditions such as the strong global employment, a strong US economy, ongoing global expansion and the fiscal stimulus program in major consumer markets, I anticipate, to positively impact global semiconductor consumption. From the micro industry's standpoint, again, we see improving trends, such as a slight pickup in both utilization rate, for the field capacity or wire bonder and we also experienced a slight pickup in our shipment late in the March quarter.

Also major changes such as the 5G and IoT are anticipated to be key drivers supporting higher level of semiconductor unit growth. We continue to anticipate the 5G transition will reinvigorate the premium smartphone market, drop demand for infrastructure buildup and broaden adoption of new low-cost end devices. We expect our core market-leading product 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 polishing to drive operating leverage as we optimize our business and enter new market. These efforts are focused on four specific areas. Enhancing market shares in aftermarket products and service, improving gross margin 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 to what is a multi-pronged initiative.

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

I will provide some additional detail 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 did not anticipate a modest progression toward industrial 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 operating driven by ongoing customer interest of our expanding and competitive advanced packaging portfolio.

We booked $115.9 million of revenue, gross margin of nearly 48% and generated profit on non-GAAP basis. In-spite of 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 support 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 quarter was most pronounced within our capital equipment segment, which decreased by 35%, while our APS business declined by 14%. Within capital equipment, ball bonding reduced by 47% and wedge bonding reduced by 16% sequentially. Several of our advanced packaging tool, APAMA, thermo-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'll cover this quarter's financial overview in greater details. Lester?

Lester Wong -- Chief Financial Officer, General Counsel and Senior Vice President, Legal Affairs

Thank you, Fusen. My remarks today will refer to GAAP result, unless noted.

Net revenue for the quarter was $115.9 million, gross margins 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 growth 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 initiative.

Compared to the March quarter one 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 regulations 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 our 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 to finance 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.

Fusen Chen -- President and Chief Executive Officer

Thanks, Lester. While the near-term environment continue to be challenging, we remain optimistic. When we look further out during the macro and the micro trend, such as strong global employment, ongoing stimulus program in major consumer market, improving utilization rate for our equipment and the key trends that are impacting demand for our core products, such as 5G, IoT, automotive and solid-state memory.

Unique to our business, we are also very excited with our new business prospect and the customer attraction within our growing advanced packaging portfolio. Our Mini-LED solution in addition to our fundamental optimization plan. As mentioned in today's press release, we believe the 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 in line with several significant transitions in our space. First, our core ball and wedge bonding offering, where we have a leadership position, are well positioned to benefit from the industrial recovery and also long-term fundamental semiconductor unit demand driven by electric and autonomous vehicle. The 5G transition, Internet of Things and solid-state memory. We continue to anticipate this significant trend will support a higher than average semiconductor unit growth rate over the coming years.

Second, our multi-pronged efforts surrounding advanced packaging are also gaining traction. There continue to be increasing interest and adoption of new packaging technique in both high-end memory and larger applications, supporting cloud, artificial intelligence and also consumer electronics. In March quarter, we recognized revenue on several APAMA thermo-compression tools, supporting advanced and high volume large production at a major OSAT. We also continue 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 solution in the market.

Typically, I'm 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 tool over the coming months. Considering the extreme speed of this tool, which is up to 5 times faster than typical pick and press tool. 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 multi-faceted 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 the high potential customer engagement provide us with increasing confidence that we will exist this soft demand environment with enhanced fundamental strengths and growth prospect.

This concludes our prepared remark. Operator, we will now be happy to take the questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) And thank you. Our first question comes from the line of Christian Schwab with Craig-Hallum Capital Group. Please proceed.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Hey. Good afternoon, guys. Thank you for all the color. I was just wondering, Fusen, just 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?

Fusen Chen -- President and Chief Executive Officer

Okay. So Christian compared to say three months ago, we see signs of positive directions, like the field utilization rate actually going up and we also see some OSAT companies starting to think about adding additional capacity. In fact, we (inaudible) OSAT company already start to add small capacity. And industry also expect the memory to reach big growth by end of the year. So we see here and there are positive signs and we believe we are at the 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, you should be able to judge it. But actually we feel quite positive from here.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

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'd be great.

Fusen Chen -- President and Chief Executive Officer

Sure. Thank you, Christian, for the questions. So we've proposed a three-year model in July 2018 and when we look back -- actually, this was at table cycle. Then we are -- we need semiconductor memory cycle as well as US-China trade tension. So at this moment, I believe we are in a stabilized phase and that we are on our way for recovery. So to answer your question, whether we can achieve our $1.2 billion revenue goal by 2021? Actually, it depends a lot on the strength of this industrial recovery. So, I would say this. In 2017, actually, we grew 30% compared to 2016. So if we can see the 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 APS, which has yet to generate any significant earnings. Then I believe we still have good chance to achieve $1.2 billion by 2021. But if recover rate is somewhat slow, then we might take -- we might need to take additional year to achieve $1.2 billion in 2022. But let me answer your question maybe from a different angle. In 2018, we generated $171 million cash from operation. So hopefully by 2020, our earning power will expand and the contribution will come from what I just mentioned, advanced packaging, Mini-LED and APS, which has yet to generate significant revenue. And then in 2018, our share count was 69 million shares and our current account 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 for the share repurchase plan is $140 million. This amount is capable to repurchase additional 6 million shares at the current stock price. So what I'm trying 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.

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

That's great. Thank you, guys.

Operator

Thank you. Our next question comes from the line of Krish Sankar with Cowen and Company. Please proceed.

Krish Sankar -- Cowen and Company -- Analyst

Yeah. Hi, thanks for taking my question. A couple of them. First on the March quarter, Fusen or Lester, can you say how much was auto and advanced packaging as a percentage of revenues?

Lester Wong -- Chief Financial Officer, General Counsel and Senior Vice President, Legal Affairs

Just a second, Krish. So auto was, we kind of combine auto and industrial together, so auto industrial is about 27% and advanced packaging is about 20% or so.

Krish Sankar -- Cowen and Company -- Analyst

Got it. Got it. Okay. And then when you look into June, it's nice to see the revenue grow, but it looks like that sequential growth rate is below what your typical seasonality or whatever you'd quantify that as. So is the weakness in June primarily auto related or you're seeing pockets of other weakness too?

Fusen Chen -- President and Chief Executive Officer

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

Krish Sankar -- Cowen and Company -- Analyst

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 your breakeven revenue was, I think it was like $120 million or something like that. So is that still the case or is it gone below that?

Lester Wong -- Chief Financial Officer, General Counsel and Senior Vice President, Legal Affairs

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

Krish Sankar -- Cowen and Company -- Analyst

Got it. $120 million to $125 million. Okay, all right. And then a last question. Fusen, obviously, given your short lead in 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 do you think that -- where are we in that purchasing pattern? Thank you.

Fusen Chen -- President and Chief Executive Officer

Okay. I think generally our company, including OSAT -- our customer including OSAT, they have the capacity and also replacement around 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 holding, start to add a small amount of capacity. And so, I don't know if I answered your questions. So in general, I think utilization rate is going up and the capacity updating is following mobile, a module.

Krish Sankar -- Cowen and Company -- Analyst

Got it, got it. That's very helpful. Thanks, Fusen.

Operator

Thank you. Our next question comes from the line of David Duley with Steelhead Securities. Please proceed.

David Duley -- Steelhead Securities -- Analyst

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

Fusen Chen -- President and Chief Executive Officer

Yes, that's correct.

David Duley -- Steelhead Securities -- Analyst

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

Fusen Chen -- President and Chief Executive Officer

Yes, historically.

David Duley -- Steelhead Securities -- Analyst

Okay. Now, a little bit of a hypothetical here is you're -- 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 a 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?

Fusen Chen -- President and Chief Executive Officer

Yes. So, if you look at the total device produced, a trillion devices per year, majority actually use the ball bonder as a way to do the packaging. So advanced packaging at this moment, the market shares -- total market shares for the packaging, I think, is still low. So the company you just mentioned will have significant revenue growth. If this come from general -- the -- including higher technology node, then my answer is yes. I think this will not trigger or this is a indication that the broader recovery is taking place. But if it is just a limit on advanced packaging, the answer might not be very compulsive. I don't know if I answered your questions.

David Duley -- Steelhead Securities -- Analyst

Yes. Thank you. Well, it's a hypothetical, so you know, it's better -- 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 three tools, that you were referring to or does that include advanced packaging wire bonders that are classified as advanced -- in the advanced packaging bucket?

Fusen Chen -- President and Chief Executive Officer

Okay. So -- actually, this is including all our advanced packaging we mentioned, for example, in the TCB and, of course, our flip chip is yet to generate any revenue and our stud bumping, our hybrid tool and, of course, we also come in advanced memory, so advanced memory included is nodes over 20%.

David Duley -- Steelhead Securities -- Analyst

Okay. And you -- 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 -- what areas do you expect to improve sequentially in the June quarter?

Fusen Chen -- President and Chief Executive Officer

Well, actually, we see -- of course, at this moment, memory alone is somewhat positive and still some inventory capacity need to be purchased. But I think by end of the year, the big growth will start to resume. So memory actually (inaudible) a little bit weak, a lower -- a single prospect, I'm always a strong believer for the 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.

David Duley -- Steelhead Securities -- Analyst

Okay. Final thing from me is, you mentioned I think that you shipped a lithography tool for advanced packaging. Can you give us a bit more greater detail about what's going on there?

Fusen Chen -- President and Chief Executive Officer

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

David Duley -- Steelhead Securities -- Analyst

Thank you.

Operator

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

Peter Peng -- B. Riley FBR -- Analyst

Hi. This is actually Peter Peng calling in for Craig Ellis and thanks for taking our questions. On the March result, the gross margins outperformed. Can you talk about the bearings in the gross margin line?

Lester Wong -- Chief Financial Officer, General Counsel and Senior Vice President, Legal Affairs

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

Peter Peng -- B. Riley FBR -- Analyst

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 is there a certain area that's more stronger?

Lester Wong -- Chief Financial Officer, General Counsel and Senior Vice President, Legal Affairs

I think a lot of the growth has been 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 led by general semi as well as mobility devices and a little bit by LED. So I think ball bonder would be the one that would be leading to growth.

Peter Peng -- B. Riley FBR -- Analyst

Okay. Great. And one more question from me is on the buyback, good job on the execution. Is it 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?

Lester Wong -- Chief Financial Officer, General Counsel and Senior Vice President, Legal Affairs

Well, we constantly 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 up $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 normally that we talked about at Analyst Day.

Peter Peng -- B. Riley FBR -- Analyst

Thank you, guys.

Operator

Thank you. 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.

Joseph Elgindy -- Investor Relations and Strategic Initiatives

Thank you, Roya. Before closing, we wanted to inform investors that we will be participating in several upcoming conferences and roadshows through the June quarter, including the 20th Annual B. Riley FBR conference in Beverly Hills, Cowen and Company's 46th Annual TMT Conference in New York City, the Baird Consumer Tech Conference also in New York City, the Stifel 2019 Cross Sector Insight Conference in Boston and finally the 11th Annual CEO Investor Summit in San Francisco.

Thank you all for the time today. As always, please feel free to follow up directly with any additional questions. Roya, this concludes our call. Good Day.

Operator

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

Duration: 33 minutes

Call participants:

Joseph Elgindy -- Investor Relations and Strategic Initiatives

Fusen Chen -- President and Chief Executive Officer

Lester Wong -- Chief Financial Officer, General Counsel and Senior Vice President, Legal Affairs

Christian Schwab -- Craig-Hallum Capital Group -- Analyst

Krish Sankar -- Cowen and Company -- Analyst

David Duley -- Steelhead Securities -- Analyst

Peter Peng -- B. Riley FBR -- Analyst

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