Kulicke and Soffa Industries - Q2 2024

Transcript

Operator (participant)

Greetings and welcome to the Kulicke & Soffa 2024 second quarter results and conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Elgindy, Senior Director of Investor Relations. Thank you, sir. You may begin.

Joseph Elgindy (Senior Director of Investor Relations)

Thank you. Welcome everyone to Kulicke & Soffa's fiscal second quarter 2024 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. GAAP to non-GAAP reconciliation tables are included within our latest earnings release and our 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 and are subject to risks and uncertainties that may cause our actual results and financial condition to differ materially from the statements made today.

For 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 filing, specifically our most recently filed Form 10-K and the Form 8-K filed yesterday. With that said, I'll now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen.

Fusen Chen (President and CEO)

Good morning, everyone. While certain markets, including LED, automotive, and the industrial, continue to be a challenge in near term? We remain focused on expanding our market position and driving new and successful customer qualification over the coming quarters in Thermo-Compression, VFO, and Advanced Dispense. These expected successes, combined with a recovering core market and a significant focus on operational efficiency, will be beneficial to customers, employees, and investors over the coming years. Before discussing this quarter's result and outlook, I wanted to briefly discuss Project W and our overriding customer engagement strategy. Since 2017, K&S has evolved by growing intimate customer engagement. This customer-focused growth strategy has been successful and has allowed us to take shares in new markets as we expand our competency.

A few recent examples of this engagement approach include our effort to enter advanced display market, enter the co-packaged optics markets, expand our shares in leading-edge logic, and actively enable the next high-volume packaging format for DRAM. Our Advanced Dispense business is taking a similar customer-focused approach, which I will explain shortly. While our intimate engagement strategy has provided a new market access, share gain, and profitability, there will always be a potential risk that a project may be canceled by the end customer, which unfortunately was the case for Project W. Industry challenges combined with macro factors likely play a role in our customers' decision to discontinue this program, which is a supply chain partner, including K&S.

Project-related assets and the tools, raw and finished goods inventory, as well as open purchase orders with our vendor, were accounted for in the second quarter's impairment charge, which has affected both GAAP and non-GAAP earnings. Lastly, related to the cancellation of Project W, we have restructured to remain lean and have reallocated resources to accelerate other critical business initiatives, including fulfilling a sizable purchase order and broadening customer demand for memory, Advanced Dispense, and advanced packaging solutions. Restructuring and the reallocation decision are never taken lightly. Although these actions were necessary to maintain a focused operational model, we continue to expect gradual market recovery through fiscal 2024 with greater technology and capacity opportunity in fiscal 2025. Near term, we continue to anticipate demand improvement led by General Semiconductor combined with a more resilient memory demand.

For General Semiconductor, more of the order activity is improving and supported by utilization trend. Also, customer momentum continues as we broaden advanced packaging engagements. Since our second fiscal quarter 2023, we have already experienced an over 50% increase in ball bonder revenue despite ongoing headwinds within automotive, industrial, and LED markets. We continue to prepare for a more robust demand in General Semiconductor applications as order activity with high-volume customers gradually accelerates. After market closing yesterday, we announced a sizable purchase order of 1,000 RAPID Pro systems from a fast-growing assembly and test company, which were upgraded with our ProSuite response-based mounting and looping capabilities. Improving utilization rate combined with a high-volume order provides us with optimism on near-term General Semiconductor recovery. Next, demand for LED has remained limited due to low utilization rate across our customer base.

The automotive and the industrial market continue to face near-term headwinds. Although based on utilization rate and customer feedback, we anticipate demand to stabilize with a broader recovery to begin over the coming quarters. Despite the current softness, our current quarter automotive revenue run rate, fiscal year 2024 to date, is 33% above our most recent automotive and industrial trough run rate experienced throughout fiscal year 2020. This fairly rapid increase in trough-to-trough performance is largely driven by a broad and secular trend we are enabling. These trends are driven by global electric vehicle, sustainable energy, and smart power distribution needs, which provide ongoing growth opportunity. Finally, memory has sequentially reduced from a very strong quarter, largely due to customer mix change. Demand for our memory solution has expanded significantly from the trough level we experienced last fiscal year.

During the first fiscal half of 2024, our memory revenue has nearly doubled from our entire memory revenue in fiscal year 2023. We expect demand across memory applications to continue to recover over the coming quarters. Looking ahead, our core business is anticipated to strengthen as General Semiconductor continues to improve, and we remain very focused on near-term execution. New technology wins in memory, share gain in Advanced Dispense, and the broadening of our Thermo-Compression customer base. I would like to take a few minutes to explain each. First, within memory, we continue to actively qualify and develop Vertical Fan-Out or VFO solutions, utilizing our Wafer Level Packaging system, which is expected to expand our memory market access over the coming years. While VFO memory solutions are still emerging, customer momentum is strong, and we expect they will transition into high-volume production next year.

In addition to leading memory customers, we continue to actively support key vertical wire development with leading IDM and fabless companies. Who are depending on these new solutions? The benefit of our unique vertical wire solution extends well beyond the memory market. Vertical wire is currently moving into high-volume production for shielding requirements and is well positioned to provide a new cost-effective packaging solution for future high-volume System-in-Package applications. Our VFO team is currently supporting development of a future stack connectivity application, which can drive high-volume adoption. Next, our Advanced Dispense business continues to gain momentum as we are aggressively penetrating high precision dispense opportunities in advanced packaging, battery assembly, and display markets. Broadening customer interest and ongoing evaluation progress are driving momentum, and we expect to begin growing our market share in the near term.

Our Advanced Dispense solutions are highly competitive due to their micro dispensing capability, being equipped with self-compensation, in-line inspection, and excellent repeatability. Qualification win over the coming quarter will secure a foundation of Advanced Dispense customers, which will support revenue growth in fiscal 2025 and beyond. Finally, we continue to gain momentum in Thermo-Compression Bonding or TCB, which has expanded in revenue by nearly four times, comparing the trailing four quarters of demand over our fiscal 2021 result. As customer momentum continues to build, it is becoming clear that our TCB solution can broadly support and scale chiplet and heterogeneous integration. Furthermore, we continue to expect demand for our leading Fluxless TCB solution to increase significantly in the future.

We have already built a baseline of approximately $60 million of sales during fiscal year 2023 and currently have active new engagement with over 10 separate Fluxless TCB opportunities supporting key IDM, OSAT, and foundry customers. We continue to receive multiple inquiries for additional TCB opportunities with other customers. This funnel of growing demand across a wide customer base serves as a testament that we are in the early stage of TCB growth. The need to efficiently create more transistor-dense package will only accelerate this market momentum. Our Fluxless TCB solutions are extremely well positioned for the next wave of demand, and we remain committed to near-term execution. Upon near-term customer qualification success and healthy customer demand trajectory, we anticipate our dedicated advanced packaging solution, which includes flip-chip mass reflow, TCB, and Wafer Level Packaging systems, to approach $200 million in annual revenue by fiscal year 2025.

Continuing upon near-term qualification and the business execution, growth across advanced packaging applications is anticipated to further accelerate. Looking more near term, new engagement for next generation, High-Bandwidth Memory or HBM, can potentially begin shipping as early as this calendar year. Also, our unique copper-to-copper capability has very strong customer momentum and could potentially delay higher volume adoption of hybrid bonding due to a more competitive cost of ownership. Currently, our advanced solution team remains very focused on near-term customer engagement with leading IDM, OSAT, and foundry customers. This broad group of customers requires a cost-effective process that supports high bandwidth, fine pitch interconnect, and stacked die capabilities. Our leading Fluxless TCB solutions are well positioned to support high-volume copper-to-copper interconnect with pitch from 35-5 microns.

Our capability to pick from tray, tape and reel, or wafer and bond to substrate, chip, or wafer is robust and expected to support the broad future market of Thermo-Compression mounting. Today, our Fluxless TCB solutions are best in class and have allowed us to be first to mass production through our engagement with a leading IDM. In parallel, we have also continued to take shares with leading OSAT as they begin to ramp 3D assembly for high growth and high-volume markets such as mobile sensing and co-packaged optics. We made significant progress over recent years to expand our TCB shares across this initial base of IDM and OSAT customers, who we have built long-term relationships with. Over the past few quarters, we have continued to allocate additional R&D resources towards specific foundry opportunities, which we anticipate can present a sizable portion of the future TCB marketplace.

Today, our global TCB team is actively engaged to support the future interconnect needs throughout all of our customer engagements. We look forward to announcing additional qualification win and a new partnership over the coming quarters. In closing, we continue to look forward to a brighter 2025. We have an intense focus on enhancing operational efficiencies, are preparing for a core market recovery, and continuing to support key technology transitions with our growing memory, Advanced Dispense, and advanced packaging opportunities. We look forward to sharing our near-term progress, which will solidify our foundation for future growth. I will now turn the call over to Lester for the financial review update. Lester?

Lester Wong (CFO)

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. While there continues to be headwinds across specific end markets related to macroeconomic and industry conditions, it continues to remain an exciting time for the company. As Fusen mentioned, we are pleased to see improving order activity with higher volume customers and anticipate additional groups of customers to begin ramping for both capacity and technology needs over the near term. During the March quarter, we generated $172.1 million of revenue and a 9.6% gross margin. Without this quarter's unique charges, gross margin would have been similar to the prior quarter. During this recent quarter, we booked pre-tax charges, including impairments, in the amount of $105.5 million.

As you recall, we announced on March 11th that the company has anticipated pre-tax charges, including impairments relating to the cancellation of Project W, to be between the low estimate of $110 million and a high estimate of $130 million. By the end of fiscal year 2024, we expect our total charges to come in below our high estimate of $130 million. In addition to reallocating key R&D members to in-demand projects, we prudently reduced resources which have directly and indirectly supported Project W. We booked GAAP tax expenses of $6.4 million for the March quarter, which included tax items related to unique events during the quarter. We continue to anticipate an effective tax rate above 20% through the remainder of fiscal year 2024. Our repurchase program remained opportunistic, and we have again increased our repurchase activity sequentially.

During the March quarter, we booked $37.3 million of open market repurchases activity, which represents a sequential increase of nearly 40% over the December quarter. Although gradual, recent order activity increases expectations of broader General Semiconductor end market growth. We continue to anticipate near-term headwinds within the automotive and power semiconductor end markets and also anticipate approximately $15 million of lost revenue relating to the cancellation of Project W in the second fiscal half. Looking into the June quarter, we expect revenue of approximately $180 million ±$10 million with gross margins of 47%. Non-GAAP operating expenses are anticipated to be $72 million ±2%, which includes additional wind-down expenses of approximately $2.5 million. Collectively, for the June quarter, we expect GAAP EPS of $0.17 per share and non-GAAP EPS of $0.30 per share.

Over the coming quarters, we look forward to providing additional updates as we reach new milestones which will help build a foundation in memory, dispense, and Thermo-Compression opportunities over the coming years. This concludes our prepared comments. Operator, please open the call for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Krish Sankar with TD Cowen. Please proceed with your question.

Krish Sankar (Managing Director and Semiconductor Capital Equipment and IT Hardware Research Analyst)

Thanks for taking my question. I have two of them. First one, on your General Semiconductor wire bonder business, it looks like that's kind of bouncing off the bottom. Fusen, do you think this is a cyclical recovery for the wire bonder business, i.e., utilization rates are going up for OSATs and you're beginning to see true end demand pull through, or is this more a bouncing off the bottom until visibility gets better?

Fusen Chen (President and CEO)

Well, Krish, I believe, in general, the recovery was not strong enough. Expected last quarter, automotive power semi and LED was a center of stubbornness when we have General Semiconductor recovery, right? But even with this, actually, second quarter mitigated by stronger ball bonder improvement. In fact, ball bonder, I think, increased in revenue by 55% in Q2 of 2024 versus 2023. So going to Q3, even general semi continued to go up, but the LED and the power semi and auto also incrementally also get weaker. So what I'm trying to say is I think this industry probably needs a little bit more ball bonder recovery. And even we have a General Semiconductor recovery, we also have a headwind in auto. That's what I'm trying to say. As a result, actually, part of that, they actually canceled together, right?

But what I'm trying to say is I think 2025 will be a better year for us. If we see some recovery in PC, phone, and auto, this should be very easy to add on a ball bonder in a much bigger way, right? So I don't know if I answered your questions. I think recovery is underway, but when we have increased in general semi, we also see the weakness in auto. That was the reason, I think, it was a bit slower. But looking forward, we expect the recovery will be more broader and add in PC, phone, and auto. And at this moment, even we have stronger ball bonder, 55% above the 12th, but still only 40% of FY 2024 revenue compared to the peak. I think our recovery still has a long way to go, and probably this industry needs a little bit broader recovery.

Krish Sankar (Managing Director and Semiconductor Capital Equipment and IT Hardware Research Analyst)

Got it. Got it. And then one other quick follow-up. Can you give us an update on your PCB qualification in the Taiwan foundry? I thought the qual is expected to be done around this time where the end customer is moving from hybrid bonding to TCB. Can you give us an update there?

Fusen Chen (President and CEO)

Okay. Krish, let me first to tell you, I think the hybrid bonding and the TCB, actually, they coexist in this market, right? So what I said to okay, I can tell you this. The foundry is one of several priority engagements for us at this moment. We have actually engagement and qualification for multiple applications with our new fluxless technology there, right? So it's not only a single project. As I mentioned, we are currently the first and the only fluxless technology provider in the mass production for the whole industry. The advanced technology process in foundry is always very lengthy. The production of this new advanced technology for production is intended for CY 2025. We are in early discussion for shipment to begin in the first half of CY 2025, right? So we expect to reach a new short-term milestone and give you an update.

Even prior to our next call, right? So what I try to tell you, I think we feel like progress is good, but the qualification in the foundry really takes a very, very lengthy. Let me give you an example. We anticipate this foundry relationship to progress similar to our engagement on the IDM side. We began to engage in 2021 and began to actually take the shares 18 months later, right? So qualification can take a little bit longer. This is the TCB application. TCB actually is increasing importance in the beginning. We have a very good presence in OSAT as well as IDM. We do expect it's just a matter of time. Since we have multiple projects, we will grow our shares in foundry in coming quarters.

Krish Sankar (Managing Director and Semiconductor Capital Equipment and IT Hardware Research Analyst)

Got it. Thank you very much, Fusen. Thanks.

Fusen Chen (President and CEO)

Okay. Thank you.

Operator (participant)

Our next question comes from Dave Duley with Steelhead Securities. Please proceed with your question.

Dave Duley (Managing Principal)

Good evening. Thanks for taking my question. I also have a follow-up on Thermo-Compression Bonding. I guess one of your competitors had a conference call a few days ago talking about how they thought that all the memory guys were going to pursue kind of a dual strategy with both Thermo-Compression Bonding and hybrid bonding. I think they implied that Thermo-Compression Bonding would be the kind of technology of choice for HBM3 and HBM4. I'm just wondering where we are at as far as working with the memory guys with thermo- compression bonding. Do you see TCB as the near-term solution for stacking these memory die, or will they continue to use the current technology? Thanks.

Fusen Chen (President and CEO)

Okay. So we actually believe TCB right now is a production tool, and next generation will still be TCB. One of the reasons, I think, is capability. The other reason is really the cost. We are engaging next generation of HBM, and our working together system probably potentially will be shipped by end of this year fiscal calendar year. I think we also have another exciting project we call VFO. This is a project actually can physically reduce the form factor of a memory package by 40% and also increase I/O as well as improve electrical performance. The first production actually is intended for low-power DDR, but one of our memory customers also have a roadmap for HBM but will not be for the next generation HBM, but actually one of our customers has a potential to be as an HBM. So we actually work on both ways.

TCB, we actually focus on heterogeneous integration and chiplet. This is for advanced logic. But for the memory, actually, we have VFO. Actually, both of our projects will increase our potential revenue. So to answer your question, I think TCB is a focus, and we believe TCB is a use is simple and capable. We believe current generation and next generation of HBM is going to be TCB.

Dave Duley (Managing Principal)

Okay. Great. And my second question has to do with the core business. You announced a 1,000-unit order, I guess, for a new wire bonder. I'm assuming this is the first big order that you've received. Would it be fair to assume usually when you get one big order, you start to collect other large orders from the other OSATs or IDMs because they all kind of tend to order at the same time? Is that the assumption that we should start to make here, is that you're starting to roll up these big orders on a more consistent basis?

Lester Wong (CFO)

Well, Dave, that's Lester. We are definitely seeing over the last couple of months gradually improving order requests as well as customer inquiries, RFQs. The POs are starting to come, as we indicated, this one big PO is starting to come in. We do see the utilization rates also creeping up, so that also is an indicator of higher volume purchases. And even in the weaker end markets, we are starting to get some discussion with customers about their sort of future demand. So yeah, I would say that we do believe that, as Fusen said earlier, the second half will be better than the first half, but definitely early FY 2025, that's when the ramp probably should kick off.

Dave Duley (Managing Principal)

Thank you.

Lester Wong (CFO)

Thanks, Dave.

Operator (participant)

Our next question comes from Tom Diffely with D.A. Davidson. Please proceed with your question.

Tom Diffely (Head of Institutional Research)

Yes. I appreciate the chance to ask a question here. Fusen, on the memory side, nice explanation of the Vertical Fan-Out and the Thermo-Compression Bonder. Curious, though, are those all just focused on the DRAM market? Because historically, you've been stronger on the flash side or the NAND side. So curious if these technologies are looking at both memory types or just DRAM.

Fusen Chen (President and CEO)

Actually, thank you for the question, Tom. At this moment, memory market is recovering. At this moment, we believe NAND play a little bit stronger role. But go back to your question, this Vertical Fan-Out, we are working with all the memory customers. This is a very exciting all the memory customer, and behind that actually is a bigger IDM company. We actually have the DRAM with all the memory customers, but we also have one NAND company working with us for the Vertical Fan-Out, right? So to answer your questions, this Vertical Fan-Out, we believe just at the initial stage, start with low-power DDR, and even NAND, I think, is a get started for the development. And in the future, it's going to be applicable for other applications, not only memory only, right? So I hope I answered your question.

Tom Diffely (Head of Institutional Research)

Yeah. No, perfect. And then a follow-up on the display side, I guess, two-part question here. First is, how fungible is the team going from display to TCB and dispense? And then with the exit of Project W, what is your outlook for display for your other sets of tools?

Fusen Chen (President and CEO)

Okay. So let me answer your second questions. I think micro LED visibility is somewhat unclear due to the project cancellation. The impact on industry actually is really there. micro LED, we do believe is a setback for the whole industry for a few years. Not sure, two years, three years. But despite change micro LED, a high-speed pick-and-place die transfer system is still needed for the mini LED application. And this will be still a good opportunity for our LUMINEX. And at this moment, actually, we are still targeting smaller die size, mini LED for direct emissive large-format display with a high volume opportunity for our LUMINEX in the second half of CY 2025, right? So the project is ongoing. But in terms of people, actually, it really depends on the capability of people, right? If the project cancels, for sure, impacts some of the people.

For some people, if we can actually continue for them to contribute in the company, I think mechanical engineer is a mechanical engineer. We do also keep a big part of the people and in a useful project for the futures.

Tom Diffely (Head of Institutional Research)

Great. No, it's very helpful. Appreciate your time today.

Fusen Chen (President and CEO)

Okay. Thank you.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Ross Cole with Needham & Co. Please proceed with your question.

Ross Cole (Equity Research Associate)

Hi. Thank you for taking my call on behalf of Charles Shi. So my question is, can you describe the significance of the 1,000 system order from this fast-growing assembly and test customer? What kind of ASP uplift should we be thinking about relative to your more standard ball bonder systems? Thank you.

Lester Wong (CFO)

Well, Ross, I guess this is one of our more advanced ball bonder systems. It's a China-based customer. Again, it's about a 1,000-machine order. And again, it serves mostly the general semi-applications, consumer, smartphones, PC. Again, this is some of our most leading technology. And again, the customer not only bought a significant amount of new bonders, they also upgraded their existing bonders with our new ProSuite, which is our advanced bonding looping software.

Ross Cole (Equity Research Associate)

Great. Thank you. And then could I ask a second question as well? What was the backlog like exiting the March quarter? Can you provide some directional color if you don't want to quantify it?

Lester Wong (CFO)

Sure. So I think the book-to-bill for the quarter was approximately about one, which has pretty much, it's the normalized level other than when you're in a ramp or in a trough cycle. So we have seen bookings improve. Backlog has come down, as we said, as we burned down some of the orders that we received during the ramp. So I think it's much more at a normalized level now, similar to our lead times, which is about 8-12 weeks for ball bonder and about 12-16 for wedge bonder.

Ross Cole (Equity Research Associate)

Great. Thank you.

Lester Wong (CFO)

Thanks, Ross.

Operator (participant)

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

Joseph Elgindy (Senior Director of Investor Relations)

Thank you, Maria, and thank you all for joining today's call. Over the coming quarter, we'll be presenting at conferences in Minneapolis, New York, and San Francisco. As always, please feel free to follow up directly with any additional questions. This concludes today's call. Have a great day everyone.