Greetings and welcome to the Kulicke & Soffa 2020 Fiscal First Quarter Results Conference Call. At this time, all participants are in a listen only mode. A 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 of Investor Relations and Strategic Initiatives for Kulicke & Soffa. Joe, please go ahead..

Thank you. Welcome everyone to Kulicke & Soffa’s first quarter fiscal 2020 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 28, 2018.I would now like to turn the call over to Fusen Chen for the business overview.

Please go ahead Fusen..

Thank you, Joe.

Throughout the December quarter we experienced expected seasonal softness in the general semiconductor market, which has been more than offset by a resurgence in demand for our advanced packaging, memory, and automotive focused solutions.In addition, during this year’s recent CES event in Las Vegas, we were pleased to see the strong alignment and relevance our broad equipment offerings have with new and future consumer devices.I’ll provide more detail to these later but first a review of the December Quarter.

Over the past several years our sequential revenue change, December over September, has averaged a 14 percent sequential reduction. This year was quite different, and we were able to generate $144.3 million of revenue, representing a slight 3% percent sequential improvement.

We were also able to deliver very strong gross margins of 48.8%, net income of $13.5 million and GAAP EPS of $0.21.The revenue improvement was driven by both the Capital Equipment and Aftermarket Products and Services segments, again due to improved demand for our advanced packaging, memory and automotive-focused systems.General semiconductor and general LED focused customers represented 57% of our December quarter sales, which were sequentially down by approximately 15% although included a larger proportion of our feature rich, Rapid line of ball-bonders.Our dedicated advanced packaging solutions represented 17% of December quarter sales, an increase of 29% sequentially.

During the December quarter our APMR business has strengthened, we had a new APAMA customer win.

We are engaged in multiple qualifications with Katalyst and we continue to exceed our planned targets for Pixalux – our mini and micro LED system.Memory represented just over 10% of December quarter revenue, a material increase of nearly 200% sequentially.

Demand within Automotive and Industrial applications represented approximately 20% of December quarter’s revenue, an increase of roughly 24% sequentially.

This was driven by traditional Automotive OEM customers and new demand for battery assembly capacity.While key markets such as Memory, Automotive have improved, we do not believe these markets have fully recovered and we anticipate additional improvements through fiscal 2020.

Overall, healthy utilization rates and aftermarket sales, as well as meaningful improvements within key Automotive and memory end-markets increases our confidence in an ongoing market recovery which we expect to improve further throughout fiscal 2020.Ongoing market traction within our dedicated advanced packaging systems, including our mini and micro LED tool, add confidence to our longer-term revenue targets.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 $144.3 million dollars, gross margins of 48.8% generated $70.4 million dollars of gross profit and net income of $13.5 million, or $0.21 per diluted share. Gross margins came in better than expected, largely due to product mix.

This mix included a higher relative contribution of our APS business, stronger feature-rich, ball-bonder demand, as well as a few higher-margin Advanced Packaging sales.Looking into next quarter we anticipate gross margins to return to approximately45%.

We expect product mix to drive this reduction which includes increased LED sales and a lower proportion of APS, relative to Capital Equipment. Operating expenses again came in more favorably than our expected target range.

This is due to an ongoing and focused effort on discretionary and non-critical costs savings.Looking into the March quarter we anticipate returning to our target range of $53 million of fixed expense plus 5% to 7% percent of variable expense, tied to revenue.Turning to tax, we booked a net tax expense of $2.1 million, an improvement from last quarter.

We continue to target a long-term average effective tax rate of approximately 18%.Turning to the balance sheet, we ended the December quarter with a total net cash and investment position of $540.4 million, or $8.43 on a diluted share basis.During the December quarter, we have continued our repurchase activity, and deployed $5.4 million dollars to repurchase $224,000 shares.

At the end of our December quarter, we had approximately $91.8 million remaining under the existing share repurchase authorization.On a book value per share basis, we closed the December quarter with $12.09, an increase of $0.06 from the September quarter.

Working capital, defined as accounts receivable plus inventory, less accounts payable, reduced to $249.1 million.From a DSO perspective, our days sales outstanding decreased from 126 days to 124days.

Our days sales of inventory increased from 108 days to 116 days and days of accounts payable increased from 44 days to 55days.This concludes the financial review portion of our call. I will now turn the discussion back over to Fusen for the March quarter’s business outlook..

Thanks Lester. From our standpoint, lower semiconductor unit volumes have caused the demand for our products to be below the longer-term seasonal patterns due to broader industry and macro-trade dynamics. Over the past decade, annual semiconductor unit production grew at a compound annual growth rate of just over 6%.

Over the past year, we believe the industry has expanded at a much slower rate.Looking ahead, 5G capabilities, artificial intelligence, new IOT devices, the growth in big data, and an automotive evolution are anticipated to accelerate semiconductor unit growth to a rate well above this historical 6% average.

This anticipated growth is very positive for our unit-driven products supporting the general semiconductor and LED space.In addition, our new market opportunities are disruptive and are expected to grow much faster than the industry as they provide a very compelling value-proposition relative to existing approaches.

This is apparent in the display market as well as within advanced logic and memory applications.Over the past few years we improved our organization, expanded our served available market with new, innovative and extremely competitive offerings to become a true multiple-product and multiple-market company.

This added diversification is critical and provides higher-growth opportunities that are delivering fundamentally new capabilities, are less exposed to the inherent cyclical nature of semiconductor unit production and have the potential to dramatically enhance corporate-level profitability.Considering these efforts, we are now entering a very exciting time.

Our new products are gaining traction and we believe the recent period of softer demand is behind us.

While we remain very confident in the long-term, short term uncertainties triggered by extended facility closures throughout China have caused us to broaden our guidance range.For the March quarter, we are anticipating revenue to be between $140 million and $170 million.

This marks the fourth sequential quarter of revenue improvements, represents over a 7% increase from the December quarter and a 34% improvement from the same period last year.Looking to the long-term, our broad solutions are increasingly aligned with major semiconductor packaging trends, as well as trends that are likely to impact the broad consumer market.

The Consumer Electronics Show in Las Vegas this month, helped to highlight these new possibilities.We are not going to provide a detailed summary although it’s clear that from toothbrushes, to door locks, to ovens, to televisions, there is a growing appetite for connected, semiconductor-rich devices.

New devices in addition to faster and higher bandwidth connectivity services like 5G, will drive more streaming, cloud processing and artificial intelligence applications.Over the coming years we are confident these new technologies will support an increased growth rate of global semiconductor production and drive increased demand for our products and services.In parallel we continue to make meaningful progress with our new advanced packaging products.

These new products continue to represent fundamental long-term market opportunities providing more collaborative customer engagement, increased diversity, and new growth vectors.The key products providing these new opportunities, including APAMA our thermo-compression system, Katalyst our High-Accuracy Flip Chip system and the Pixalux, our mini and micro LED systems.

We continue to achieve our aggressive growth rate in parallel, for all of these new initiatives.For Katalyst, we are working aggressively towards new customer qualifications and continue to receive positive customer feedback. Specifically, our Katalyst tool began to ramp production in a high-volume, leading-edge, logic application this past quarter.

Katalyst continues to be extremely competitive and we are very focused to seek out new customer engagements and qualifications over the coming quarters.Next, we were able to recognize revenue on two APAMA systems this quarter.

APAMA has been running production at a major OSAT for several quarters supporting a high-volume smartphone application and we were recently able to penetrate a new high-potential image-sensor application.Our customers continue to leverage thermocompression technology for applications we haven’t initially anticipated, such as in more complex multichip packages, and also image sensors.

Our system is performing very well in a high-volume production environment and remains very competitive.

More recently, we have also engaged a longer-term technology collaboration, with a high-potential customer, which further diversifies our end-market opportunities.Finally, the Pixalux, advanced LED system, continues to perform well and we recognized revenue on five additional systems supporting new direct-view and backlighting applications within the display market.

We continue to operationally prepare for Pixalux demand to begin ramping materially during the second calendar half and anticipate this new opportunity to expand considerably through calendar 2021 and beyond.Pixalux and our other Advanced packaging tools are all extremely competitive, and our global teams continue to engage and drive new customer adoption.

Over the coming year we anticipate the pace of new customer engagement and demand for our products to increase meaningfully.Overall, we are very excited to demonstrate our value creation potential as we pursue these new opportunities in coordination with the expected industry recovery over the coming quarters.The entire K&S organization remains extremely committed as we execute our strategy of creating and delivering shareholder value.This concludes our prepared remarks.

Operator, we will now be happy to take questions..

[Operator Instructions] Our first question today is coming from Tom Diffely from D.A. Davidson. Your line is now live..

Yes, good morning and good afternoon. First of all I'll start on the Coronavirus, it sounded like the impact of the unknown from the Coronavirus caused you to reduce the low end of your guidance by about $10 million.

Is that a good way to read it?.

So, Tom actually, this actually is a very difficult to quantify, but all continues, so far we did not see any other pressure or cancellation in much quarters, but the risk in extended facility culture actually impacted on production in China.

So, but impact actually is manageable at this moment and we need to monitor the production shutdown will be further extended or not. And, you know, but what can I tell you is the demand actually is quite strong. So, as always people coming to work, as our future stay very bright for us.

And this phenomena [indiscernible] you know our company we actually saw a case [indiscernible]..

Okay. And I know the last quarter we talked about, you talked about how the utilization rates in China were upwards of 90%.

Are you still seeing that high level utilization rates with your tools in the field there?.

Hi, Tom, it's Lester. So China has softened slightly. I think it's more feasible, softer general semiconductor segment. Taiwan has strengthened a little bit. So, I think China is it still around 90% while Taiwan has improved a little bit closer to 80% now..

Okay, great. And then just a couple questions on the new products.

You talked about the image sensors been a new market you penetrated here, what is the size or opportunity in that marketplace?.

I'm sorry.

What products? Can you repeat please?.

Yes, the APAMA for the image sensor market?.

Okay. So, actually, I think for the new product, I probably can probably give big high level updates. I think this year, you know, the second half we prepared a ramping [ph] for the Pixalux. And really it depends on the precise schedule. We are targeting 5% to 10% of calendar revenue.So that is about maybe $35 million to $70 million.

And we believe this product has a lot of potential, because there will be a lot of devices will need to have mini LED applications. So we are positive about Pixalux. And this is the year we believe very important for all of us [indiscernible]. We have multiple qualification ongoing for our Katalyst Flip Chip, and also APAMA TCB.

So APAMA [indiscernible] qualification and the design win we expect to ramp up our [indiscernible] in 2021. So that's our focus.

I think this is going to be a year 2020 to ramp Pixalux and 2021to ramp in AP [ph], including our Flip Chip and APAMA, and APAMA right now, I think that we have more and more consumer, started from one major customer, and right now we started to penetrate a few other customers..

Okay, great. And finally when you look at….

[Indiscernible].

Go ahead..

Okay, I'll tell you, - you were talking about imaging sensor. I think we are talking about may be in 2021 and beyond we're talking about maybe $7 million roughly right now..

Okay, that's helpful.

And then, as we look at the ramps of some of these new products, just wondering on the margin side, are these accretive to margins or do they hit margins a little bit? How do you view margins as we roll into some of these new product designs?.

Well Tom, I think as we roll the new products, I think we've indicated before, the newer products, whether is advanced packaging or mini and micro LED, their margins about the corporate margins, so they definitely should be accretive to margins..

Okay, thanks for your time..

Thank you. Our next question is coming from Krish Sankar from Cowen & Company. Your line is now live..

Hi, thanks for taking the question and congrats on the good results.

First question, either for Fusen or Lester, how much was China as a percentage of sales in December, and how much do you expect it to be in March?.

Hi, Krish. China in December quarter was about 53%, and in March we believe it will be about the same..

Got you. And Lester, since you kind of highlighted that March, the mix shifts more towards LED and that's one of the reasons why you see a slight impact or negative impact on gross margin, is it fair to assume pretty much all that LED business is coming from China?A - Lester WongYes..

Got it, all right. And then a question for Fusen. I think in the past, you've spoken about the micro LED opportunity being maybe around, but it's like a $15 million in calendar 2020.

Is that still the case?.

Yes, I think the ramp is going to happen in calendar, in the second half. So it really depends on the precise schedule, right. We haven't - the schedule can be earlier and can be pushed out a couple of weeks. So it really depends on the precise schedule. I think we are targeting maybe between $75 million to $70 million for the whole calendar year..

Got it..

[Indiscernible] implementation to the market, hopefully 2021 and beyond can be bigger..

Got it. That’s really helpful. And then just a final question Fusen, you know, when I look at the auto industrial, you said it was like 20% of the mix. In the past some of this auto business you had like actually is extremely lumpy comes up and then like, goes away for a few quarters at a time.

Is there anything different this time or do you think the auto market is more sustainable for you?.

Well, so, as you know, we are quite positive about auto business in the long-term because of few things, one is a semiconductor content per vehicle is going to increase, right? And number two,I think they are mainly along the battery packaging and assembly in [indiscernible]. So, at the beginning, you will always see it lumpy.

And we do believe in the longer term it should [indiscernible]. So I do agree, I think, for the past few quarters, you're going to be lumpy, but for longer term I think we are quite confident on the prospect..

Got it, all right. Thank you very much Fusen and congrats..

Okay, thank you, Krish..

Thanks Krish..

Thanks. Our next question today is coming from David Duley from Steelhead Securities. Your line is now live..

Yes, thanks for taking my question. I had a couple - you've talked on the last couple of conference calls about the ramp up in Pixalux and how it should produce, I guess, $35 million to $70 million in this upcoming year.

Why - you seem highly confident about that ramp happening, what is it that gives you confidence that you will see that level of business with this new product?.

Okay, I think we have a few customers, right? And we work closely with them. And just like any other business, then if they have a plan, I think we will come together and come on focus. So I think this really depends on the [indiscernible] introduction schedule.

And it can be pushed ahead, maybe a few weeks or pushed back a few weeks, really [indiscernible] a little bit of modification. That's why, but mainly the ramp is going to happen in the second half of the calendar year.And as you can see, this quarter we recognize already [indiscernible] systems.

So at the beginning I think right now customer order the system, for a pilot production and upon them in under a year, the volume production is going to happen and that will be the second half of the calendar..

And what are the lead times on that tool.

If the end-market products are going to ramp in the second half of the calendar year, will they be ordering, what are the lead times?.

Well, actually from a order to deliver, I think, will be a few months, you know few months means maybe like two months, something like that..

Okay. And then you mentioned in your prepared remarks and gave us a lot of data about the automotive and the memory market recovering for you in a very substantial way.

Is there some reason why it jumped so much or what was behind the rapid growth in both the automotive and the memory space?.

Well, actually our memory anybody expect this can be a year for our memory to recover. Was I meant to start first followed by DRAM. And before that, actually, there is already an indication, I think, last year, the big growth already happened.

And the December quarter actually it is about 10% of all [indiscernible] memory and compared to five-year [ph], our trading [indiscernible] for us in the memory, and also in the auto space..

Thank you..

Thank you. Our next question is coming from Peter Peng from B. Riley. Your line is now live..

Hi, this is Peter Peng calling for Craig Ellis and thanks for taking my questions.

Just following up on the memory question, it seems like, if we do the math, memory is about $40 million and you know, at the peak that you guys were doing about $35 million, I am just wondering what the trajectory of memory is? Do you see it stabilizing at this rate or do you see it kind of closing into that 35 as we go through the year?.

Hi, Peter. I think as Fusen said, [indiscernible] in response to Dave's question, I think memory is recovering. So Q4 for us it was very soft. Now it's, you know, rebounded significantly 10% for the December quarter.

We believe it will continue to grow for all the reasons we've discussed before, memory prices are going back up, both NAND and DRAM as a big growth. So we believe that our memory business will continue to go back towards, I guess, the way I wanted to [indiscernible]..

And then just on the – you mentioned some utilization rates in China and what's the overall utilization rate?.

I think the overall utilization rate again, as I've mentioned several times before, it varies across regions as well as customers, but I think it's closing in on 80%..

And jus, I think you mentioned that you're seeing more aggressive capital spending throughout fiscal ‘20.

Are you expecting more of a seasonal ramp as we go into the back half of the calendar year or is it going to be somewhat below seasonal just like the March quarter, I just want to see if you have any visibility into that?.

I think what was the measure of capital spending is may be customer capital spending..

Yes, now I think in terms of the ramp Peter, I think again we believe that there are, we believe [indiscernible] sequentially on the Q1 we said in Q4 we believe even though we don’t guide, Q2 and then in Q1, even though I don't guide into for the quarters we believe that the second half of the year will be stronger than the first half of the year..

That's helpful. Thanks, guys. Congratulations on the strong quarter..

Thanks Peter..

Thank you [Operator Instructions]. Our next question is coming from Christian Schwab from Craig-Hallum. Your line is now live..

Great, solid quarter guys. Most of my questions have been asked, but I will just ask a couple customer specific questions may be. I know Infineon just announced that they're moving production in autos to Flip Chip.

Is that an opportunity for you, Fusen?.

No. So the short answer is yes. Right sizing our Flip Chip is always very important and will become more and more important for advanced packaging and now our system is very competitive and that has been recognized by our customers. So, we are in multiple qualifications in mainly customer size, and we could even [indiscernible]..

Okay, fabulous. And then another customer specific question.

You know, given the success of Tesla, is there an opportunity for them to become a material customer for you again at any time in the next year, year and a half or so?.

Hey, Chris, it is Lester. Obviously, we don't specifically talk about any individual customers, but I think Tesla has been identified previously as a top customer. And Tesla has - they did great yesterday on their results and they are growing both in Shanghai as well as in Germany. So, we believe that there's opportunity there..

Fabulous. Great, I don't have any other questions. Thanks, guys..

Well, thank you Christian..

Thank you. We reached the end of our question-and-answer session. Now let's turn the floor back over for any further or closing comments..

Thank you, Kevin. Before closing, we wanted to inform investors that we will be participating in several upcoming conferences road shows throughout the March quarter in New York, Chicago, Montreal, Minneapolis and Portland. Additional details can be found at investor.kns.com. Thank you all for the time today.

As always, please feel free to follow up directly with additional questions. Have a great day everyone. Operator, this concludes our call. Thanks..

Thank you that does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today..