Greetings, and welcome to the Kulicke & Soffa 2018 Third 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, Director of Investor Relations and Strategic Initiatives for Kulicke & Soffa. Thank you. Please begin..

Thank you, Maria. Welcome everyone to Kulicke & Soffa's Third Quarter 2018 Conference Call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer; and Lester Wong, General Counsel and Interim Chief Financial Officer.

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 these 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 30, 2017. I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen..

Thanks, Joe. Before discussing this quarter's performance, I wanted to highlight a few takeaways from our recent Analyst Day held on July 10. In summary, multiple growth opportunities, diverse end markets, our product positioning and organizational alignment helped enable us to provide long-term financial targets.

Over the past 10 years, the bonding equipment market has increased by roughly 7.5% annually. By the end of fiscal 2021, our goals are to exceed market growth by growing revenue at an average rate of 9% to 11%.

We have a diverse set of growth opportunities, stemming from a diverse set of end markets, we categorize as General Semiconductor & LED, Automotive & Industrial, and Advanced Packaging. Roughly half of our growth expectations are anticipated to support capacity expansion, the other half targets new capabilities.

We also adjusted our capital allocation target during the Analyst Day. Over the long term, from announcement of our 2014 repurchase program through the recent June 2018 quarter, where we aggressively repurchased shares, we retained approximately $175 million of capital or about 37% of operational cash flow.

By 2021, we intend to increase shareholder return, through both dividends and the share repurchases, to 50% of operational cash flow. In the June quarter, we initiated a dividend of $0.12 per share and acquired $42.6 million in open market share repurchase. We are committed to creating and delivering long-term value.

With that said, I would now like to briefly discuss our June quarter's performance. During the quarter, we generated $268.8 million of revenue and a strong gross margins of 47.2%. Combined with our lean operating model, we drove an operating profit of $64.5 million, equivalent to an operating margin of 24%.

Revenue for the quarter increased 10.2% from the same period in the prior year and 21.2% sequentially. Both period improvements were largely driven by increased demand for our Capital Equipment. Gross margin came in at 47.2%.

Gross profit dollars of $127 million represents an increase of nearly 28% from the prior period and over 11% from the same period in the prior year. This higher-than-expected gross margin was due primarily to product mix. Lester will provide some additional insight shortly. Sequentially, capital equipment increased by 29.5%.

This increase was supported by strong and incremental demand for our higher-performance Ball Bonding tools at major OSATs as well as incremental demand for semiconductor and automotive Wedge Bonding equipment. During the quarter we were established as tool of record at a major OSAT and also recognized revenue for one APAMA thermo-compression system.

We also received additional follow on orders for several APAMA TCB systems supporting high-volume production for new capability in Mobile. Within APS, our strategy and traction continued to be positive, although reported revenue had sequentially declined into the June quarter.

This decrease was uniquely driven by our APMR APS business where we recognized system upgrade related parts in the Capital Equipment segment. Our other APS businesses have remained consistent from the strong March quarter.

Going forward, we continue to be very focused on our effort to enhance our recurring revenue based business, and we maintain our goal of increasing APS towards 30% of our total revenue into the long-term. I would now like to turn the call over to Lester Wong, who will cover this quarter's financial overview in greater detail.

Lester?.

Thank you, Fusen. My remarks today will refer to GAAP results, unless noted. Net revenue for the quarter was $268.8 million, strong gross margins of 47.2%, generated $127 million of gross profit.

Gross margins exceeded our prior expectations, largely due to product mix - a lower relative proportion of LED tools, a higher relative proportion of performance Ball bonding, Wedge bonding and also Advanced Packaging tools. Back to our June quarter results, we generated $64.5 million of operating income, which represented a 24% operating margin.

Going forward, we are maintaining the existing operating model of $53 million of fixed quarterly expense plus 5% to 7% of variable expense tied to revenue. Tax expense for the quarter was $7.3 million, and we continue to maintain the 15% effective tax rate target going forward. Turning to the balance sheet.

We ended the June quarter with a total cash and investment position of $621.2 million or $8.81 on a per share basis. As Fusen mentioned, during the quarter, we deployed $42.6 million in open market share repurchases and also booked a $0.12 dividend, which was paid in the September quarter.

On a book value per share basis, we closed the June quarter with $12.55, an increase of approximately $0.23 from the March quarter. Working capital, defined as accounts receivable plus inventory, less accounts payable, increased by $40.6 million to $301.2 million. From a DSO perspective, our day sales outstanding decreased from 91 days to 86 days.

Our day sales of inventory decreased from 86 days to 71 days, and days of accounts payable decreased from 60 days to 50 days. Finally, I want to mention a few words on our capital allocation process.

Over the past 5 years, we have completed 2 acquisitions that have expanded our served markets, repurchased approximately 21% of current shares outstanding, developed a portfolio of advanced packaging products and sourced new opportunities in the areas such as next-generation LED.

Our recently announced dividend of $0.12 per quarter adds structure to our capital return process. This new dividend program, which had an outgo payout on July 16, 2018, will consume approximately $33 million of cash annually, is largely funded through our fairly consistent APS segment and supplements our ongoing open market repurchase program.

Additionally, in early July, our Board of Directors extended the existing share repurchase authorization by an additional $100 million. This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the September quarter business outlook..

Mobile Application Processors, Blockchain, DRAM and Artificial Intelligence. Our team also continues to seek out new opportunity in the emerging thermo-compression market. Our recent APAMA TCB win highlights the promising higher-volume adoption of TCB technology and also our competitiveness within this emerging market opportunity.

This recent TCB win combined with our ongoing initiatives in Die Bonding, High Accuracy Flip Chip, next-generation LED and also opportunities within APS provide us with additional assurance to deliver on our long-term and aggressive financial targets.

Despite the current market softness, we remain very confident in the fundamental of the industry, the fundamental of our business and our ability to create and deliver long-term value to our shareholders. This concludes our prepared remarks. Operator, we will now be happy to take questions..

[Operator Instructions] Our first question comes from the line of Krish Sankar with Cowen..

This is Steve calling on behalf of Krish. I had a couple of questions and starting with the first one. I was wondering, Fusen, if you could provide some more color on the September quarter guidance in terms of the trends that you're seeing or expecting for your ball bonder business and also for your wedge bonder business..

The trend into September quarter? Or December quarter?.

This current September quarter guidance that you just provided..

I see. Well, as I stated, as you know, we see actually a very strong demand in the wedge bonder and the ball bonder and the demands from OSAT company. And these are for very high-end ball bonder and wedge bonders..

And I guess in terms of the guide -- yes, in terms of the guidance....

Okay. So for Q4, actually, as I mentioned, we are experiencing a really soft market actually in the mobile and also in the memory. So as a result, I think there are some -- actually requests from some of the customers to push out the delivery from September quarter to the December quarter, and major request actually is a ball bonder..

Got you, got you. And then I guess as a follow-up....

And also as I mentioned, I think we have very unique seasonality. Since later part of 2015 from June quarter into September quarter, eventually I think the revenue decline approximately about 23%. So I think this is unique to us. It's unique seasonality. But in terms of softness, in the mobile and memory market, I think, is really not unique to us..

Okay. Got you. And just a quick follow-up.

Can you tell us what percentage of your sales in the June quarter was from advanced packaging?.

Okay. Actually, the definition of our advanced packaging, of course, it's a dedicated tool, and we have a TCB and right now we introduced Flip Chip. We also have a stud bumping, and we also have die attach. And if we also count all advanced memory packaging as well as ball bonding SiP, actually we are looking at about 16% (inaudible) into our revenue..

Our next question comes from the line of Craig Ellis of B. Riley FBR..

The first question I want to ask you since you noted that there are some customers that have requested tools be delivered in the December quarter rather than the September quarter.

But can you just talk about the visibility that you have in other parts of your business, such as automotive and other areas and the confidence that you have in the other parts of the $180 million guidance?.

Well, I think, Craig, personally, I believe this is a short-term phenomenon. As I mentioned, I think I have very strong confidence in the fundamental of the industry. And currently, we have multiple products, multiple technologies to drive across all this industry. And I also have very strong confidence on the fundamental of our business.

Majority of semiconductor IC finished products will use a ball bonder as a tool to do packaging. And we are the leader in ball bonder and also wedge bonder. In the meantime, we export a lot of gross pads in advanced packaging and also other areas. And so I'm confident.

I think, the demand is there for the industry and that we are suffering maybe short-term phenomena. So I believe -- we're really very confident for the guidance and quite confident going ahead into 2019..

Okay. That's helpful. Secondly, you mentioned your view of seasonality for the September quarter.

As you look ahead to the December quarter, what's the company's view of typical December seasonality, since some quarters, revenues can move up, some quarters, they can move down?.

Okay. So if I remember, I think in the past few years, I think Q4 and our Q1 regularly suffer, and we have a strong Q2 and Q3. That's the pattern we established. And we discussed seasonality. I think for us I'm confident the seasonality has less impact to us, is less significant, because we diversify all business.

But however, I think seasonality is always there. The biggest -- I think, strongest sign for the seasonality, I think, is from June to our September quarter..

Okay. Got it. And then tying in the guidance for the September quarter with the recently established longer-term target model, the longer-term target model really signals 9% to 11% annual growth that the guidance would imply, I think, a 14% year-on-year decline.

So when do you think the business will be back to year-on-year growth? Would it be in the December quarter, Fusen? Or would it be in the March quarter or sometime thereafter?.

Well, I think really a lot to do is what is an uncertain period, right? I think that we have short-term uncertainty, and it's really not unique to us. And hopefully, this kind of, for example, trade tension can be resolved by itself in the next couple of quarters.

Then, hopefully, Q4 can be higher for us, right? So again, I think this is not unique to us. This probably is the whole industry. But I'm hopeful this can be very short term, Q4, hopefully. We will have -- the latest, I think, Q2, and that means the March quarter will be a strong quarter for us..

Got it. And certainly, you heard other companies talking about smartphones and memory. Getting a few questions in for Lester. Lester, particularly strong gross margins in the quarter.

Was there anything in the quarter that was onetime in nature that wouldn't recur in the September quarter?.

Hi, Craig. Not really. I think the high gross margins, as we indicated, was mainly driven by the mix. We have less LED ball bonders and much more high-performance ball and wedge bonder. So our gross margin is pretty tied to the mix of our business. And right now, we don't see the mix changing significantly.

I think, we are still looking toward the guidance we usually provide for the year of around 45% gross margins..

Got it. And then lastly on operating expense. It was much better than I had expected. And it looked like it outperformed the variable expense model.

So thereto, what accounted for the excess performance? And would any of those things be more structural than temporal, and therefore, carry into either the September quarter or into -- further in the second half of the year?.

I think, it's a little bit of both. Structurally, I think, as we discussed on Analyst Day, and Fusen has emphasized since he joined the company, we're driving down cost reduction, trying to get leaner.

There is a temporal aspect with it in terms of, in high-volume quarters, our -- again, our OpEx -- the variable OpEx dropped 5% to 7%, does allow us -- the fixed cost actually always is not as high. So I think it's a little bit of mix -- I'm sorry, of both.

But I think the cost reduction, obviously, will continue into the September quarter and going forward..

Our next question comes from the line of Tom Diffely with D.A. Davidson..

First, I was kind of curious what your outlook is on the automotive side. And if you could address both the IC automotive part of the market as well as the battery, the EV battery side..

So Tom, you're talking about September quarter?.

No -- well, just over the next couple of quarters, yes. September would be helpful, but just thinking more just over the next few quarters..

Okay. Okay. So I think automotive is always very strong for us. And in the Analyst Day, we categorized our business into few segments, one is general semi, one is automotive, one is advanced packaging. So we believe auto in this year probably will be about 24% of our total revenue and will continue to be very strong.

And the short-term impact, the softness, I think is more related to capacity. So this will be impact related to more on general semiconductor..

Yes. And what about on the battery side? That can be quite lumpy..

Actually, we are tool maker for a major EV company. And a lot of people, for example, in China actually also adopt the same technology. So in the meantime, I think, we also see a strong demand from China. So we believe the wedge bonder way of -- we'll continue to do it..

Okay. Yes, the lots of wedge bonder helps offset some seasonality in the fourth calendar quarter.

So I guess looking at your customer base, with the consolidation of the 2 largest players, OSAT players, has that impacted your market at all?.

Well, actually, we didn't see that. I think, as of this momentum, financially, they're consolidated but operational-wise, it's really not consolidated yet. We work across together with both companies, have a good relationship.

So no matter combined or not combined, I think we will continue to have a very strong relationship and help each other to take up our relationship to the next level..

Okay. And then finally at your analyst meeting, you talked about the 3 areas of growth going forward, the general semi, LED, auto, industrial and advanced packaging.

Which of those markets have the best chance of driving growth in 2019?.

Okay. Actually, I think all of them. For example, advanced packaging, we start to establish OSAT company. And from now to the end of the year, the second half, we expect revenue maybe 5, 6 tools. And hopefully, next year will be bigger. Our die attach also getting traction (inaudible) iStack.

In 2018, I think we probably only focused on customer, but engagement with multiple customer already started. So we believe our 2019 can be start of our advanced packaging.

But we expect 2020 will be a bigger year for advanced packaging because this will be including in not only TCB, not only die attach, also included in recent announcement of High Accuracy Flip Chip..

[Operator Instructions] Our next question comes from the line of David Duley with Steelhead Securities..

A couple from me.

First of all, could you talk about what is the application or this -- the OSAT TCB, one that you're referring to?.

Okay. I think this is for high-end mobile device and for the app processor..

Okay. And -- all right. And how large do you expect this piece of business to be over this year and next year? I guess you just were talking about 5 or 6 tools. Is that kind of the expectation? Or maybe you could frame it in dollars or just what you think that will be accounted for in 2019, let's say..

So this year, I think we are talking about maybe about $4 million, and hopefully, we can double next year, right? And other than that, I think there are new variants of TCB. The industry need to deal with bigger die, larger die. And we are currently engaging with multiple customers. So we -- actually finally, we do see traction of our TCB business..

So will the -- a lot more artificial intelligence and those really large NVIDIA-type chips, those are the ones that you might see further traction on in the future?.

Yes. I think for AI, both our TCB and our High Accuracy Flip Chip participate in AI..

Okay. And then on a different topic, you mentioned that you saw some push outs from, I think, the September quarter to the December quarter.

Could you -- would you -- could you help us understand what sort of magnitude you think you -- that you saw there? And what areas it came from? Did it come from memory or mobile or -- help us quantify how big the push out was and what segment it came from..

Okay. We don't think it's significant. So for example, we guide about $180 million to $190 million. So maybe we're talking about 10% of customers, 10% of revenue people actually consider to push to the next quarters..

Okay. And then as far as -- do you think that, that -- does that mean that you think December will be up sequentially? Will it snap back by this 10% that you didn't get this quarter? Or any commentary about December that you can help us understand would be great..

So well, David, I wish I have a crystal ball, right? And as I mentioned, I think this question is really not unique to our industry. They are not unique to our company. It's really the whole industry have a short-term softness. So hopefully, we -- back to see -- this can be a long quarter for us. And going to next year will be higher revenue.

As I mentioned, I have very strong confidence on the fundamental of the industry, right? A lot of our technology, a lot of products is driving the growth. So demand is there. For example, I'm a strong believer of memory demand. And -- so overcapacity is always followed by undercapacity. Over -- underinvestment always followed by overinvestment.

So it's the nature of our business and as long as the demand is there, annual IC gross unit actually has not been revised down. So if this holds true, we'd like to see. This quarter is low quarter. But I think other date is, our March quarter will be our strong quarter..

Okay.

And final question from me is, just could you give us an idea what percentage of revenue you get from the memory markets and from the LED markets?.

Hi, Dave. It's Lester. So LED is just about under 15%. And for memory, it fluctuates from quarter-to-quarter. But it's around -- for this quarter -- for the June quarter, sorry, it's approximately around 10%. Operator Thank you. We have no further questions in queue at this time. I'd like to have the floor back over to Joseph Elgindy for closing remarks..

Thanks, Maria. Before closing, we wanted to inform investors that we will be participating at the Oppenheimer's 21st Annual Technology, Internet & Communications Conference in Boston on August 8; and D.A. Davidson's 10th Technology Forum in New York City on August 9. Thank you all for the time today.

As always, please feel free to follow up directly with any additional questions. Maria, this concludes our call. Good day..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..