Greetings and welcome to Kulicke and Soffa Second Quarter Fiscal 2016 Results Conference 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, Director of Investor Relations and Strategic Initiatives for Kulicke and Soffa. Thank you. You may begin..

Thanks Christine. Welcome everyone to Kulicke and Soffa’s second quarter fiscal 2016 conference call. Joining us on the call today is Jonathan Chou, Interim CEO, CFO. As in prior quarter calls, I will assist with the financial and Q&A portion of this call.

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 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 and 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 October 3, 2015. I would now like to turn the call over to Jonathan Chou for the business overview. Please go ahead Jonathan..

Thanks Joe. As announced earlier this morning, we are very pleased to have again exceeded the high-end of our guided range of $156.4 million of revenue for the second quarter. This solid performance was largely due to increasing demand of our core businesses, in particular the latest ball bonder offerings.

Strong sales within our events packaging mass reflow offerings, which all-in-all demonstrates our customers’ continued interest and demand for a leading K&S interconnect solutions. Historically, the Chinese New Year holiday season, clouds our visibility and understanding of the depth and duration of seasonal slow-down.

Our nearly 45% sequential revenue increase and strong all-set demand gives us confidence that this recent soft period is behind us.

For our second quarter business results, the topline revenue of $156.4 million generated $69.6 million of gross profit, a 44.5% gross margin and $11.7 million of operating profit, up from a slight operating loss in the December quarter.

Our ball bonding sales increased 55% sequentially, with broad based pickup in demand supported by [offsets] in Taiwan and China. This recent ramp and continued demand for our latest core bonder offerings, reaffirms this technology’s critical role in the semiconductor assembly process and its flexibility in meeting new interconnector requirements.

With the economics of ball bonding firmly intact, we continue to invest in product road map and new feature sets, allowing to a higher growth segments such as memory, automotive, power applications, as well as fast growing package types, such as QFNs and SiPs.

During the quarter, copper shipment continued to be significant and accounted for 93% of machine sold and LED sales accounted for approximately 5% ball bonders sold. Within our ball bonder business line, we also had a nice pickup in demand for our wafer level Stud bumping solution, AT Premiere.

This offering provides a unique alternative interconnect solution for small form factor sensors, such as CMOS, CMLS sensors and microelectromechanical systems or MEMS, which are both expected to exceed in the broader semiconductor industries growth rate.

Turning to Wedge Bonder business, we were able to further increase our sequential sales, over a strong December quarter. This continued stems from emerging applications and alternative energy and storage, as well as the more traditional industrial and automotive segments.

As we look ahead to longer term drivers of semiconductor and electronic growth, the automotive segment is expected to play a more significant role than it has historically, and we are well prepared to execute against this key opportunity.

Our deep rooted long term customer relationships and installed base within the wedge and our APMR businesses provide a solid platform to leverage going forward. Moving on to APMR, our Advanced Packaging Mass Reflow business line; revenue increased significantly 153% quarter-on-quarter.

This dramatic increase came primarily from a sizeable order supporting a high volume system in package, SiP application for the performance smartphone segment. This demand is expected to continue in to the June and partially in to the September quarter.

Order of this magnitude were previously uncommon for this business, and were facilitated by the cell synergies anticipate and realized with our acquisition of Assembleon. Our operational and supply chain teams did an excellent job of executing this higher level of demand.

In parallel, our global R&D organization continued to drive new functions and features to further extend our served markets.

Finally for APLR, our Advanced Packaging Local Reflow business line, we continue to receive inquiries from broad base of customers and continue to facilitate customers’ engagement through our evaluation programs and our global applications lab in Korea, Singapore, Taiwan and the US.

While high volume thermal compression applications are currently very limited relative to the broader assembling process, we look forward to a high bandwidth memory to be the next material driver of this technology. While we are prepared to compete for this business, the market has not yet demand matured capacity additions.

We continue to prioritize our development resources to support this program, as well as our ongoing collaboration activities with the customers. I would now like to turn the call over to Joe, who will cover this quarters’ financial over view in greater detail.

Joe?.

Thank you Jonathan. My remarks today will only refer to GAAP results and will compare the March quarter to the December quarter. Net revenue for the quarter was $156.4 million, gross margin were 44.5%, with $69.6 million of gross profit. Gross margins were down sequentially largely due to product mix.

During the quarter, we generated $11.7 million of operating income, $5.1 million of net income and $0.07 of EPS. Our operating expenses were slightly lower than our prior expectations, due to lower prototyping expenses.

In to the near term, we expect to spend approximately $2.5 million per quarter for APLR related prototyping expenses, although we continue to model quarterly operating expenses as $45 million to fixed expense plus an additional 6% to 7% of variable expense based on revenue.

Moving on to the tax, during the March we incurred tax charges totaling $7 million. This larger than normal tax expense included discreet tax items that netted to approximately $4.4 million. This amount was largely associated with a tax liability arising from a settlement with a foreign tax authority for previous period.

Turning to the balance sheet, we ended the March quarter with a total and investment position of $482 million. From a diluted share standpoint, this cash position is equivalent to $6.82 and our book value equivalent is $10.80.

Working capital defined as accounts receivable plus inventory less accounts payable increased by $38 million to $182.5 million, due to the current ramp. From a DSO perspective, our day sales outstanding increased from 90 days to 94 days.

Our day sales of inventory decreased from 108 days to 83 days and days of accounts payable increased from 52 days to 62 days. Through the March quarter, we have slowed the share repurchase program, due to US cash constraints as highlighted during the last quarter’s call.

During the quarter, we repurchased 169,000 additional shares at an average price of $10.12, which accounted for approximately $1.7 million of cash outflows. From the programs’ inception through the March quarter, we have repurchased nearly 7.9 million shares or 10.1% of our initial diluted share count when the program was initiated.

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

Thanks Joe. At disclosing this morning’s press release, we are targeting revenue to come in between $195 million and $205 million for the June quarter.

A material portion of this incremental demand is stemming from tractions within SiP applications, addressing our APMR solutions as disclosed earlier, and we are pleased to confirm, it is also within the ball bonding business.

The significant trend of integration, unique feature sets and time to market requirements are clearly contributing to the adoption of System-in-Package applications, mostly for connectivity associated with IOT and smartphone applications.

As a result, market research indicate, SiP units demand is forecasted to nearly double from roughly 13 billion units today to 25 billion in 2020. This is at the package level and dies within each package will also likely increase over this time period.

SiP applications are integrating individual die through existing and new assembly methods, such as wire bonders, mass reflow, thermal compression and fan-out wafer level packaging to create a uniquely tailored solution contingent on device requirements.

Our technology leadership across our existing business lines and also development efforts towards new feature and functions, positions us to provide unique customer solutions for current and future SiP applications.

The ball bonding SiP opportunity is driving current capacity and capacity requirements driven by the emerging smartphone market, where wire bonding serves as a very flexible interconnect to draw a connection between individual die within a System-in-Package.

A material portion of our incremental ball bonding demand through the June quarter is stemming from both capacity and technology replacement among top OSATs. SiP is creating new ball bonding requirements, which are creating new growth opportunity, which we will clearly leverage our market leading position and capabilities.

Looking longer term, we also see very nice opportunities in our Wedge and SMT solutions, which are providing new avenues of growth to specifically within Advance SMT, automotive and industrial segment.

Considering this opportunity, we have made the decision to closely organize or more closely our marketing team within our Wedge and SMT business line to better provide a comprehensive set of interconnect solutions to their served markets.

Over the next five years, more incremental semiconductor units are anticipated to go in to automotive and industrial segment than every other end market combined. While the scale of absolute unit growth is interesting, more important for K&S are the unique automotive and industrial applicational requirements.

Our comprehensive product lineup designed for performance and reliability in addition to our deep customer engagements throughout the automotive and industrial space provides a solid foundation to build from.

In summary, we continue to demonstrate a fundamental long term and sustainable business improvement by expanding our solutions, driving cost reduction efforts, focusing on critical development projects and prudently deploy capital throughout the cycle. We look forward to sharing progress on our development efforts as we move forward.

This concludes our prepared remarks. Operator, we would now be happy to take any questions..

[Operator Instructions] our first question comes from the line of Tom Diffely with D.A. Davidson. Please proceed with your question..

First question on the APMR ramp here, is this the same customer as in you are creating the volume ramp or is this multiple customers that you expect, and did you say it was over the next or the June and the September quarter as well..

I would say primarily it’s a narrow concentrate of customers, but there is one higher volume customer within that narrow group. Tom..

You said these are ramp that would continue through the September quarter?.

Yeah, that’s right..

And can you say what the specific end market is for the large customer or for the majority of this business?.

It’s for the performing smartphone segment..

In general, what is the relative margin of the SiP business versus kind of the core ball bonder business?.

I would say the ball bonding business is clearly - the margin in it hasn’t really changed much, we’re holding our ASP well, and the additional requirement from in terms of the SiP requirement from the looping side, it is allowing us to continue to actually meet that demand as we speak.

Now from APMR perspective, this is a new area that basically for that business line to go into and we are continuing to actually invest in the business to basically to better differential ourselves with others out there. So I would say the pricing power will increase overtime..

So maybe a little bit of a hit to the margin, but nice margin dollar?.

Yeah..

And then you highlighted the automotive and industrial markets as growth for longer term.

What’s your exposure there today and where do you think it can go over the next couple of years?.

If you look at our existing business like wedge bonding, the power semis, we are already serving the automotive side in terms of the automotive customers. With the assembly on acquisition of the APMR business, we actually are serving automotive plus industrial customers such as medical device, other industrial customers in that space.

So we’re continuing to actually built on that and internally we’re actually are making some adjustment and modification of how we organize ourselves to better focus on those verticals to better serve those customers..

But it’s a much smaller market today for you then say the mobile consumers?.

At this point in time we believe that’s actually a growth area for us especially in the automotive side..

And then finally, when you look at the core ball bonder business, are you seeing diversification in the customers right now? Are you starting to see the second, third tier packaging houses start to move towards copper?.

Well I think the copper side, we’re selling like 93% copper this quarter, this past quarter Q2. But if you look at the top tier as well as the non-usual suspect of OSATs, the demand that we’re seeing here are across the board.

In fact we have seen a demand coming from the fact the slightly older ball bonding machine as well as actually some of our competitors machines could not meet the requirement that’s needed in these I would say, these lower end smartphone packaging.

So therefore basically the demand coming from across the board for our leaders’ ball bonding machines to perform that, to meet their requirement for them..

Your next question comes from the line of Craig Ellis with B Riley. Please proceed with your question..

The first question is just a follow-up to that last comment.

With the strength in the ball bonding business in part driven by it sounds like low to mid-end smartphone demand, can you talk about the duration with which you would expect that dynamic to be in place if we’re seeing stronger low-end smartphone demand that of emerging country, is that something that should have sustainability through this year and more of a longer term impact or is that something that you perceive to be something that’s a very short term dynamic..

I think it’s always hard to forecast how long the current ramp will go. But I can says that the current demand is coming primarily from some of the Chinese smartphone makers and through their requirements there’s actually demand coming through.

We are seeing our capacity being pushed in terms of our assembling capacity right now, and we’re seeing some pretty good demand forward throughout this current quarter and potentially in to Q4 for us..

The follow-up in the press release and in your prepared comments you identified three key opportunities, longer term auto, industrial, bounce packaging and reorganizing and marketing and field efforts surrounding some of those objectives.

Can you just comment on the relative growth of those three opportunities, which are the more material items and where will we see the P&L impacted much significantly with regard over 2016 and in to 2017 from those three drivers..

Those are great questions, and the way we are actually organizing ourselves right now I’d say previously is that we do look at these verticals, but it’s not as well coroneted across BL and that’s something that internally have actually put some emphasis on.

We actually have recently announced internally that we’re creating a team that will look at solutions that goes across all the BL and just serves these vertical in terms of industrial, automotive side.

From a growth rate perspective, we are in the process again our strategic planning process which is going from now to end of May, possibly in to early June and that’s when we actually get the latest data and analyze what the growth rate may be and see what resources we need to put in to that plan for the next three years.

So we got to hold that until our next call, while we have some growth rates and what we think we can do in that area for you..

And lastly, on the breakeven point, it was expected I believe to step down in to the $115 million to $120 million range after our prototyping expenses which sounded like they were a [million] better in the March quarter, so maybe around 5 million. Is that still the expectation and if not what would the variance be..

That’s still intact, in terms of that what we had communicated earlier, in terms of the drop in terms of breakeven level on the revenue. So that hasn’t changed in terms of what we had assured earlier..

Our next question comes from the line of Sandy Mehta of Value Investment Principals. Please proceed with your question..

The guidance you guys have given for the June quarter, that looks to be the strongest quarter you’ve had in the last 14 quarters, so since 2012, and given that the industry and Kulicke was sort of at the trough just a few months ago.

Such as strong ramp up, how should we read that? Does that imply that this up cycle will have a greater length and longevity or does that mean that there’s a change in the mix. So perhaps its advance packaging that your revenues will be both at the trough as well as the peak would be sort of at a structurally higher level long term.

How would you read that?.

The way we actually planned out 2016 during our last financial cycle, we thought 2016 was actually going to be a soft year and that the trough cycle actually will continue clearly through this past quarter. But clearly we have seen the kind of demand I just described coming from some of our key customers.

So the way we’re looking in to we’re just - it is hard to forecast in our business, but we do look at basically a data from third party analyst. 2017 should be a reasonable year, at least based on their views, as well as 2018.

So we believe the trough cycle is behind us in terms of what I’d refer to as soft period, given the kind of ramp that we’re looking at currently. The question now is really, would this continue through ’17 or ’18 that’s hard to say, to be honest with you.

But we certainly are ensuring that we are better organized to capture these demands if the opportunities are out there and we are also looking at ways to actually sell more customers better through this closer coordination across all our offerings within the company..

But do you feel like you’re going to be at a structurally higher level, so that the trough as well as the peaks going forward sort of that has been ratcheted up a bit for various reasons..

I think part of that is definitely associated with the APMR business where we’re getting some traction some real sale synergies there from some specific customers in the semi space.

Also I think that on the last couple of years, we had some pretty significant headwinds due to the initial phase of that copper replacement cycle, that sort of ended around the 2013 timeframe in a big way for us, and that delayed some capacity ads for ball bonding equipment.

It seems like that’s behind us based on your thesis on that one, and that would probably impact your overwriting hypothesis on that..

And just one final quick question, since you said that you are constrained a little bit by the cash that you have in the United States, does it makes sense to perhaps borrow some amount of money, given the strong balance sheet, may be $50 million or $100 million of borrowing at low interest rates in the US to further repurchase stock. Thank you..

That’s a good question. Obviously we were always, kind of planning ahead and analyzing how we have to bring cash back with minimum cash leakage. As you also have seen that we did add a $25 million line for basically working capital for US usage. But our ability to borrow there, the question is really when we borrow we do have to pay it back.

We have to think the longer term repayment options that we have. So we certainly can do that, but we just want to make sure that first of all the use of cash is actually appropriate and the best way to manage our business and best for our stakeholders as well, before we go down that path..

[Operator Instructions] our next question comes from the line of Rishabh Jain with Singular Research. Please proceed with your question..

So my question is really back to the ball bonding utilization rates stand at this part of time, given the (inaudible) in this quarter.

So where exactly have you guys seen an upward trend in the ball bonding utilization rates in this quarter?.

I think right now the utilization rates have been largely in line with where they have been over the last couple of weeks, even in the last quarter around 75%. And just as a reminder that’s an average mix of a lot of different customers and doesn’t break-out the differences between copper and gold.

So they each have their own utilization rates, and I can clearly add some customers utilization rates are well above that sweet spot at 80%..

I also saw a slight decrease in margins this time around to back [34.5%] from somewhere around 46%, 47% in the previous quarter.

So what exactly would you attribute these lower gross margins to this time around?.

If you look at what we said in Joe’s prepared script, it’s actually about product mix. But if you look at also historically, we been averaging above 75% OSATS and 25% IDM, but this particular its 95% OSAT. So when OSAT actually the mix kind of picks up, our margin tend to kind of trend down a little bit. That’s also a part of the reason..

You didn’t mention last time around the APMR markets around $250 million to $300 million and your market share is going to be around 38%. So, is there a revision to the guidance or where exactly do you see the APMR market as of today given the note about (inaudible) in the market at this part of time..

Well I would say, we are in a process of actually planning out a plan for APMR as a business line for the next three years. And what we are excited about the advance packaging portion of that business, we are also very excited about the SMT market as well.

And that market is, if you look at the SMT market it is 2.5 billion to 3 billion depending on really the different breakup of that particular total market.

So our team, as we speak, is actually looking at that, how do we continue to be competitive with our offerings in that market, and that’s why we have some additional alignment of SMT and our wedge bonding team for that, because a portion of that market is actually going to move again to industrial, which I did mention earlier in the earlier questions.

On the advanced packaging side, we’re getting nice traction. So we’re continuing to focus on what could be available from the market perspective. But I did mention in remark that the TCB side from the high bandwidth memory that seems to be pushed out a little bit to 2017 to ’18 on the advanced packaging side.

So I think what I like about our current advanced packaging portfolio is the fact that we have an organic and a developed platform APAMA versus the platform that comes from the Assembleon acquisition. We are able to serve the different part of the needs of our customers within the semiconductor advanced packaging space.

So in due course we’ll have better information from the market, and what I like about the fact that is we are pretty well positioned now to at least the inquiries from our customers and continue to refi and prove our solutions..

And (inaudible) on us a little bit, I think from the APLR side of thermo-compression business side, I think new technology adoption is just inherently very difficult to forecast, and we continue to believe that advanced [3D] packages will drive foreign factor, performance benefits and transistor density to offset the challenges associated with nurturing and our R&D team continues to be pretty flexible in driving and prioritizing these new development issues based on our market outlook going forward..

I’ve got two questions basically; so due to the high level of cash or any acquisitions on the part and the common quarters and technically the forecasted revenues for the next quarter are about 195 to (inaudible) which is substantially up in this quarter.

So is it mainly because of higher utilization rates prompted to leave in to ball bonding equipment or is it mainly due to like higher forecasted sales for APMR equipment..

Let me address your second question first, I mentioned the demand is actually coming from a lot of the lower cost smartphone segment for our ball bonding solutions, which is actually meeting the SiP requirements.

So, yes APMR clearly have contributed to our last quarters’ results and we’re continuing to do so throughout this current quarter, which is in our guidance. So I would say that growth when compared sequentially is coming from those two areas. In terms of cash, cash on hand mostly outside US.

Our M&A pipeline hasn’t stopped, but we continue to look at or we continue to screen out a lot opportunities. What I’m pleased to see that in terms of our pipeline management side, we’re getting a little bit refined in terms of our analysis, on how we can screen things faster.

So we always say we have actually quite a few, but the question is we’ll continue to be cautious and conservative in terms of which acquisition we will go for. So, when we’re ready we certainly will be pleased to make that announcement, but at this point in time we don’t have anything to announce..

[Operator Instructions] our next question comes from the line of Mohit Khanna with Value Investment Principals. Please proceed with your question..

Can you just talk about a little bit on APMR and SMT market strategy? What do you think could you get a higher market share, do you believe it is the pricing power that you have or a better and latest technology in these two segments? Thank you..

From the SMT side, there’s a pretty big pool of customers that are set aside to that niche automotive and industrial market, which is a small segment of the broader SMT market, although it requires high reliability, high quality interconnects that we’re largely qualified with, in addition from a wedge bonding standpoint, we also have a nice pool of strong customers that are associated with the same segments, and in a lot of cases, those customer names don’t necessarily always overlap, so there’s a lot of cross selling opportunities that we see.

With that we’ve decided to help in reshape the marketing teams by closely organizing this from a business line management standpoint. And I think generally in the longer term, a fairly significant portion of the APMR business from the recurring revenue standpoint as well as the new business is also associated with that SMT space.

And I think we can have some pretty nice leverage from a multi business line standpoint that involves in both of these automotive and industrial sides..

On the ball bonding side, do you think BVA bonding is something new that is driving sales of ball bonders currently..

This is really interesting I think we mentioned it about two years ago on our earnings call, and so we’d to basically use wire bonders and more and sort of a replacement to copper pillar, right, and its Invensys angle. And I think, it’s interesting, again it changes like this don’t know it happen that fast on the backhand.

So (inaudible) as fast as the changes that happen on a consumer front, and sure we’re interested, our engineers in Washington worked with some of those guys a couple of years ago, and it’s always interesting.

Just like set with wire bonding, it’s always nice to see the flexibility of a wire bonder get reused and then the order kind of process, and we’ve seen that in the past with [EGAs], we’ve seen it with QFN, we’re seeing it with SiP and potentially with BVA.

So it’s nice, and I think from a performance technology standpoint within wired bonding, our wire bonders have the capabilities to do other things than just direct LED or simple discreet wire bonding that sort of separates us from our competitors..

We have reached the end of the question-and-answer session. Mr. Elgindy, I would now like to turn the floor back over to you for closing comments..

Thanks Christine. As a final note, the company will be presenting at the Stifel Technology Internet and Media Conference June 6 and 7 in San Francisco. Thank you all for the time today. As usual please feel free to follow-up directly with any additional questions. Christine this concludes our call. Good day..

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..