Greetings and welcome to the Kulicke & Soffa 2021 First Fiscal Quarter Results Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Joe Elgindy. Please go ahead..

Thank you. Welcome everyone, to Kulicke & Soffa’s fiscal first quarter 2021 conference call. Joining us on the call today are Fusen Chen, President and Chief Executive Officer and Lester Wong, Chief Financial Officer.

For those of you who have not received a copy of today’s results, the release, as well as the supplemental earnings presentation, are both available in the Investor Relations section of our website at investor.kns.com..

Thank you, Joe. We are pleased to report strong financial performance, progress in our advanced display business, and improvements to our outlook, on today’s call. First, we have recently acquired US-based Uniqarta, Inc. in an all cash transaction, which enhances our competencies and ultimate potential in the fast-growing advanced display market.

Even prior to the acquisition, we worked closely with Uniqarta to accelerate the adoption of advanced mini-LED backlighting. By combining Uniqarta’s domain knowledge and unique intellectual property with our operational and development competencies, we have improved our position in this exciting Advanced Display marketplace.

We expect our next-generation advanced display systems will accelerate broader adoption of advanced displays that utilize locally controllable backlighting and also direct-emissive micro LED approaches. By the close of fiscal year 2021, we expect to introduce and initiate qualifications for our next-generation advanced display system.

We anticipate strong demand for these solutions throughout fiscal year 2022, as the broader LCD market begins to adopt new forms of backlighting. Next, the on-going strength of the general semiconductor and LED end-markets and on-going recovery in automotive demand, has improved our fiscal year outlook.

Broad trends such as 5G and advanced display, as well as the fundamental transitions in the automotive market have only recently become meaningful to our business. We expect these new secular trends to provide significant growth and market expansion opportunities over the coming years..

Thank you, Fusen. My remarks today will refer to GAAP results, unless noted. As Fusen mentioned, demand for our products and services remained strong in the December quarter with revenue at $267.9 million, up 51% sequentially. We were again able to quickly flex operational capacity to support this dramatic sequential improvement.

Gross margins in December came in at 45.4%, and we generated net income of $48.4 million, and non-GAAP EPS of $0.86. At this level of business, our operating leverage becomes significant. During the December quarter we generated operating margins of 20%, an increase of over 700 basis points from the September quarter.

Considering the operating leverage and our outlook, we expect to generate strong free cash flows over the coming years. We continue to be very focused on cost control despite the more favorable business conditions, which has helped drive December quarter Operating expenses to be slightly better than expected.

We also expect operating expense to follow our historic model of approximately $53 million of fixed quarterly expense plus 5% to 7% of variable expense tied to revenue. We do not anticipate a material increase to our operating expense model as a result of the Uniqarta acquisition.

Tax expense for the quarter came in at $6.3 million and we continue to target an 18% long-term effective tax rate target, although anticipate the effective tax rate coming in closer to 15% in fiscal 2021.

Turning to the balance sheet, we ended the December quarter with a total net cash and investment position of $576.7 million, up $46.5 million sequentially, which represents $9.19 per diluted share. The Uniqarta acquisition closed in the March quarter and the cash impact will be reflected in our March quarter’s results..

Operator:.

Yes, good morning. Good afternoon.

So, just wanted to confirm the new outlook for 2021 fiscal 2021 is $1.1 billion up 75% year-over-year?.

That is correct..

Well so, when you look at the obviously the very strong growth this year, you can split it between how much of is driven by this unit growth industry versus share gains maybe versus increased intensity for your tools?.

So, Tom, I think due to few reason, number one, of course, in the past two years '19 and '20 because of semi downturn and under investment from customer and we're not go another way. So we expect this year will be slightly higher than 6% to 6.9%. So, number one is really the unit growth coming back. The number two, I think it's a very significant.

I think we have seen that different phenomena. For example, the transition from 4G to 5G, we are seeing the demand full a multi-die package. Give example is our SIP module. So this module actually, typically have a four die to 40 dies. Actually demand increased significantly due to transition to 5G.

And not only the amount of the multi-die package increased, the die is much more complicated. So the time to process this package also increased dramatically. So therefore, capital intensity increased. So all this only I think we can give guidance in normal year our base should be around $750 million.

We take a three years average, I think, 2017 is normal year, '18 very strong year and '19 is a very bad year. So you take the average is about $750 million. So this should be a presentable number of our base line in the normal of the year..

Okay, now that's, that's great. That's good color. So I guess I want to switch gears here and look at the acquisition of Uniqarta. So I guess a couple things.

First, is that a competitor to Lohini? Do they have any revenue associated with them, and you would give us a rough idea of what the cost was?.

Okay, so I will have Lester answer the cost. So I think Lohini is our first partner, and the product is called Pixalux. This is all first generation of mini and micro LED system. And in 2020, last year, we guide the industry, and also we accomplish revenue around $40 million.

And last earning call, I think we guide the revenue for 2021 will be $60 million to $80 million. I think we are more close to a high end. All the system, we are going to ship is Pixalux. So this is our first generation of all the products.

And in my script, I also mentioned by the close of fiscal 2021, we expect to announce our next generation advanced Advanced Display system. And this will use 100% of our KNS IP after a collision of Uniqarta. And the second generation system is expected to contribute to our fiscal 2020 revenue tax. So your question is the difference of these two system.

How do we position it? I think around mid-2022, we will have a overlap of these two system and, but we believe our second-generation of our system which we utilize 100% own IP, we'll have a much higher productivity and should take off I think a lot time probably around middle of 2022. So I hope I answered your question, Tom..

Yes, now, that's great. Thanks..

The acquisition price was around $26 million..

Okay, was there any revenue associated with that or was just purely IP technology?.

It's a purely technology acquisition..

Great. Okay. Thank you for your time..

Thanks, Tom..

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

Hi, thanks for taking my question. I had a couple of them. Fusen, you mentioned about how there has been underinvestment in backend spend, especially wire bonding. And, ASC this morning also spoke about why bonding demand being tied through all of 2021.

So I'm just kind of curious what is your visibility today on wire bonders, given what your big customers are saying? And should we assume that, if wire bonding is going to remain tied to all of 2021? Are they going to add excess capacity this year or do you think it’s going to be more smoother for the next couple of years, and then add a couple of follow-ups..

Krish, I don't know if I understand fully your questions.

Can you repeat again quickly?.

Sure.

So, you spoke about under investment in wire bonding by the cuts for the last couple of years? So now that they're doing a catch-up investment, how long do you think it's going to last?.

Okay. So let me put this way. I think the estimate from the market this year is about a trillion die -- semiconductor-die will be produced, roughly a trillion die. And the estimate over market share of the ball bonder, I think about 65% of this die processed by ball bonder between 65% to 70%. So ball bonder is here to stay.

And the ball bonder also wins through a lot of our technology improvement. Although we did not provide very detail information. Actually, ball bonder a lot of technology associated with that.

For example, currently all the segment maturity actually is use the ball bonder and many, many there are risk taking and also multi-die package I mentioned, including SIP and also included multi-die module actually is very complicated ball bonder process. So to answer your question, I think this year; the revenue for ball bonder is very strong.

Maybe is a little bit strong than needed because of two year under investment? But we are quite optimistic that ball bonder is here to stay and the label actually the industry needed to support the overall industry growth, I think a ball bonder will continue to grow..

Got it. Got it. That makes sense.

And then two other quick questions, one is on Pixalux, did you guys update your FY 2021 revenue targets of Pixalux or is it still $60 million to $80 million?.

Yes, that’s correct. That's what we got last quarter. But right now, we are ranging maybe like this quarter is about $22 million, right. So hopefully, we will reach a higher end over a little bit this year, for FY 2021..

Got it, got it.

And then a final question, Fusen, on the Uniqarta acquisition, is it fair to assume that your Pixalux, the pick and place technology that works well for mini LED might not scale up for micro LED that's why you need a laser transfer approach for micro LED? Is that the way to think about the acquisition? Or are you going to still work in parallel to improve Pixalux placement speed?.

Okay. I think, the -- we do believe -- I know if you see the script our PR, press release, this is a laser basis technology. We believe the potential productivity is much, much faster. So I'll give you example, the large TV very, very large TV if you need mini or micro LED, you probably need to place about 25 million die.

So we are just at the entrance stage of this industry's growth, right. We are talking about maybe less than 100 hours that is more, that means a the second process less than 100 die. I think in the future, the speed need to be much, much faster to support this industry's growth.

That's why I think Uniqarta we chose it to be next generation of technology.

And I mentioned, we have Pixalux, and we have next generation, we believe may be around middle of 2022 will be crossover and the industry will decide which one will be the faster technology, and we feel like -- we will have a positive productivity probably for the Uniqarta based on the industry at large..

Got it, got it. Thanks, Fusen. And really, congrats on the strong listings. Thank you..

Thank you..

Okay. Our next question is coming from Craig Ellis from B. Riley. Your line is now live..

Yes. Thanks for taking the question. And, and congrats as well on the strong execution in the quarter and meeting the tremendous upside demand. Fusen, I wanted to just start by going back to some of your comments on the market for fiscal 2021. And thanks for all the color so far.

The question is this is, as we look at the new fiscal 2021 demand outlook for revenues of $1.1 billion.

Can you help us understand as you look into the back half of the fiscal year, where do you have a relatively higher lower demand visibility across your different end market opportunities?.

Okay, so correct the first quarter I think we delivered 267.9, right Lester. So, the second quarter, I think we got 300. So if you add this together it’s a little bit more than 550, I think 567 right? So we are looking at, if you have a mirror image, so Q2 the second half can be the mirror image of the first half.

That means, we expect Q4 probably it will have a seasonality as usual, but it's not going to be very significant, right? So if we model Q1 is comparable to Q4, and Q2 and Q3 comparable, and actually, we got about 1.1 billion.

So does that help?.

It does. My question was actually a little bit different. And it was really related to the visibility that you have into the demand that makes up that profile.

So underneath that profile, is your visibility similar across auto things, other end markets that you mentioned, like, like 5G smartphones and gaming cards and consoles that are in consumer? I noticed, at least from the investor deck that memory revenues are very low in the quarter.

Do you see memory coming back and if so, to what extent through the back half of the year?.

Okay. So I think general semi is strong in all from Q1 to Q4 continuously. I think auto will start to be stronger this quarter. I think our conventional auto is also coming back, LED is helpful. So we do believe from Q1 we start to see auto will be quite strong and that will help our wedge bonder a lot.

And for the memory, at this moment, we don't see full recovery yet, but actually we see -- actually start to see recovery come in. So we do believe our next few quarter memory will start to pick up.

So memory probably is last second one other than money AV segment, I think we see very strong demand, but we already see initial investment of memory coming in.

Also from a past few years, actually the industry utilization rates started going up and also the big growth per year, I think compound annual growth rate CAGR is consistently close to 30% every year. So we do believe our memory is on the way to come back..

That that's very helpful. My next question goes back to some of the comments and prepared remarks from you and Lester, and it relates to supply. So clearly a phenomenal operations quarter in the December quarter meeting demand and then implied in the outlook for March with the $300 million in revenue.

The question is this, if demand this year were to be meaningfully above the current $1.1 billion forecast, would the company have the ability to flex up supply further to meet that demand or at the current forecast do you see, either constraints or other bottlenecks that would preclude revenues from being higher than that if any of the end markets that you just discussed proved to be stronger than we can now see?.

Yes, so Craig, So, I think the demand is really strong right now. But as you also know, the industry have a minor -- maybe a little bit more than minor problem for the supply chain constraints. We know there are component shortage also semiconductor die shortage and also some of our largest fiscal constrained for in the flat also have a difficult.

So, we are comfortable with a $1.1 billion goal, although, we still have upside, but the upside maybe will be constrained. At this moment the global supply chain constraints. But we are not going to give up, whatever we can do, we will try the best. So, to answer your question, I think this demand is also very dynamic.

So, if you ask us, we can give you at this moment, it looks like there are still outside, but there are also significant headwind for the supply chain shortage and $1.1 billion is the number we feel comfortable and there are upside, but there is also risk that's why I think we need to monitor and pull our effort if we want to realize additional upside..

That's very helpful. And my last question is a longer term question. And it goes back to the target model that the company set a few years ago. And the questions that, it's clear that there appears to be across virtually all end markets, demand strength that has underlying drivers that are multi-year in nature.

When a company set its target model, the midpoint, the low end was $1.1 5 billion. So you're almost getting to that low end this year with current guidance.

The question is this, given the multi-year nature of demand, what are the gives and takes to potentially seeing the mid-term model revenues in fiscal 2022? I believe that one underlying assumption there was a significant increase in services revenues.

Can those revenues ramp quickly enough really to get us towards that, that $1.187 billion? Or might there be other areas of strength that are just greater, for example, the degree of advanced packaging uptake, that could more than offset that if that didn't come to deliver us towards that target financial model midpoint in fiscal 2022? Thank you..

Okay. So I think with this significant ramp, of course, that is a little bit difficult to predict next year, but I think I mentioned today in the Q&A, original our guide -- guidance for the normal year this night is about $750 million. We are not with capital intensity. I think we are seeing effective because of capital intensity increase.

So this very close to $1 billion much closer than before. And on top of that, I think we have upside on flip chip and TCB. These are new product for us, right. So for long-term, I think they are very important.

Our flip chip is a very, very good at accuracy and very high productivity and TCB, I think we actually are quite comfortable with a few design win, hopefully we'll ramp up also for the next couple of years. So we have flip chip, TCB display market, I think it can also be a upside for us and also APS.

APS, I think, I'll give you example, 2017, our revenue maybe $140 million and then this 2020 is about $170 million. We do believe in these three years or three, four years, we have another upside for another $40 million, $50 million. So all you're adding together.

So, hopefully I think what I answer is this, I think the industry next couple of years should be very, very healthy. So as long as the industry is healthy, I think our core business is very, very healthy for us and we also have upside, for LED I mentioned our dedicated advanced packaging flip chip and TCB and also our display and APS.

I think we are quite optimistic for KNS and the whole industry for 2021 and beyond..

So Craig to add on what Fusen said, right. On top of the revenue he built for you.

We, given our tremendous operating leverage, we believe that at above a billion dollars, which again, as Fusen just indicated that there's a clear path to it on a sustainable basis, that the operating leverage would allow us to have an ETF of between, close to $3 on a sustainable basis..

That's very helpful. Gentlemen, thank you very much..

Thank you. Our next question is coming from David Duley from Steelhead Securities. Your line is now live..

Thanks for taking my question. Congratulations on great results. I guess my question is, when I look at your backlog, it certainly suggests that your order rates were substantially above the revenue that you just reported, probably like $140 million above. Has have your overall I guess that I'm assuming that your overall visibility has extended.

Could you just help us kind of understand how much more visibility you have now and then maybe help us understand have your lead times extended? What are your current lead times for wire bonders?.

So, Dave our visibility has extended as we put in the backlog, customers are putting in PO at a tremendous rate not just for the next quarter, but for the remaining rest of the fiscal year given the very tight demand for our product as well for all products, as well as lead time, lead time now has gone up significantly.

I would say it's almost up to about 40 weeks or so 30-40 weeks. So I think we do have much better visibility, which is why I think we were comfortable in terms of giving guidance of $1.1 billion for the year..

Okay, great. As far as contribution? I think on the last conference call, roughly your guidance for the year was like $780 million, and now you've bumped it up to $1.1 billion.

Could you just talk about the difference between what the delta is in your segments of business between the $780 and $1.1 billion, roughly, where you've kind of gone through this, but this is asking the question different way, where did the upside come from in your annual model from the $780, to the $1.1 billion?.

So Dave, I think I think it's across all sectors, to be honest. I mean, I think general semi is still, it's really driving the business. I mean, general semi was close to about 74% of our of our revenues for this quarter. And general semi basically went up by about, I guess, it went to about 70%. Right.

Automotive more than double went about 100%, from the December quarter, and LED went up above 80%, right. So we see strength across all the segments. I think automotive is definitely coming back. And you can see that in terms of the headlines every day, in terms of automotive companies having line down. So there's a real push right now.

So again, I think the difference is, it's just an incredible across the board..

Excellent. And what is $1.1 billion kind of target of a revenue for the year? As far as the operating margin performance going forward? I mean I think you just achieved a number we haven't seen since for some time.

Should we expect this 19% or 20%, run rate, whatever, I guess it was 20%? Is that the kind of the expectation throughout this calendar year for an operating margin goal?.

Well, Dave you know I don't guide below for the year below revenue. But I mean, I think if you do the math, in terms of we believe the gross margin will be to be consistent around the level we have this quarter of between 45% and 46%. We believe that we always said expense OpEx is about $53 million to 5% to 7% variable.

And then there is or is it guided to a effective tax rate of 15%. So, I think you come very close to the number you just said..

Yes, I think it does generate, by the way, a little bit more than $3 in earnings. So congratulations. I look forward to the business continuing to improve throughout the year..

Okay, thank you David..

Thank you. Our next question is coming from Christian Schwab from Craig-Hallum Capital Group. Your line is now live..

Excuse me, congratulations, guys on just a fabulous quarter and outlook and the ability to ramp that. Fusen, as we listen to this and we look at some of your other peers on the backend I'm curious your thoughts on this. But, it seems to me that we're seeing a tremendous industry shift in value.

That is actually just starting in the back end of the semiconductor equipment process where capital intensity is beginning to meaningfully increase, something we saw when the NAND industry had to switch to 3D and when foundry logic had to shrink, sub-28 right? So we were seeing, general semiconductors, you're seeing increased volume and complex chips, chips that used to be one package that are now four or six or eight.

And, on top of that, we're seeing drivers like 5G and automotive, medical and WiFi upgrade, cause disproportionate volume even greater than the general industry is doing.

And with that, multi diet packaging is creating increased complexity which is causing where we started increase capital intensity and it doesn't seem like there's other technologies that could disrupt this trend.

It just seems where the industry is going in a post Moore's Law world if you will that, we're just going to see more and more multiple chip packages for an extended period of time, an we've under invested for years.

So unless there's some type of economic dislocation that is caused globally, again probably more than likely, if we can't get the COVID under control.

I mean the out, this could be very similar to the shift that we saw on the front ends, this could be a three to five year trend that just keeps on going, and then stays extremely capitally intense especially if we're going to go from 200 million, 5G smartphones to 3 billion extra plus or minus over the next four to five years.

Am I thinking about that right? Is that's what you guys are trying to say?.

Yes. Yes, I think -- yeah, actually we agree.

We are quite optimistic overall industry and Christian on top of what you say, I think we also tried to get into very exciting new business like the spread and I think this will also provide additional engine for us and we do believe at this moment, we have a best two of our industries and we are going to keep in our differentiation against our any potential competitor.

So with the strength in the industry and also more than More's law industrial trend and plus new opportunity we are getting in, I think we are quite optimistic at this moment..

Right. And I guess my last question has to do with cash. What are your thoughts? We are over the course of the next few years with these type of trends and revenues and the way your model flexes, we're going to have substantial amount of cash on the balance sheet in a couple of years.

Can you give us -- you already have a substantial amount? Can you give us an idea of when you think about you've been historically a very shareholder friendly repurchaser of your shares in the open market, but can you kind of tell us kind of what you're thinking as far as cash?.

Sure. I will add something and then I have Lester also contribute few sentences. So, at this moment, because I give you example of Pixalux, from the day our development would generate revenue. I think we pick a little bit just more than two years and we are seeing the sizable revenue.

So we also believe we have a few other products maybe in the same way and we will continue also in the new display industry. So, let the story short, in the short-term, I think that we have many growth engine and Uniqarta is additional one, we believe additional technology can help us grow.

This is one path, I think we probably like a lot and we are doing dividend. We're doing stock buyback. We are not going to give up, this will continue. So if M&A, I think will be the last choice. I think we will be very, very careful. I think that in the short-term there is rent we need to deal with.

And there is a lot of new technology that can aid for our future growth and they are in a start-up stage and we are also looking at many of these. So, mega story short, I think the organic growth, we are quite confident we can do very, very good. Just internal grow by ourselves by acquire somewhat special technology, that's one-way.

And for the shareholder return, dividend and also buyback, we will continue and even M&A, like elections come up, we will not give up. But so far I think that we are not paying huge of attention in the bigger M&A at this moment..

So Christian, I think, I think we've always consistently deployed cash as quickly as if it was available. Like in the different geographies, because obviously, as we mentioned before, we do have certain restrictions in bringing certain cash on shore.

And I think as Fusen said, we have deployed a significant portion of our free cash flow in terms of both the share repurchase, as well as the dividend. I mean, on the share repurchase we've returned close to 80% of free cash flow to our shareholders since 2015. And if you look back last year, that's fiscal 2020.

We return up close to 110% year before over 250 close to 250%. So, I think that's significant.

I think the other uses of cash as Fusen allocated is that we do believe that there will continue to be interesting technology bolts on that will help accelerate our development like Uniqarta has for our advanced display, as well as for some adjacency technologies that will help us build. And then also, again, we do look at prudent acquisition.

A reminder is the acquisition of assembly on is what allowed us basically, to have picked a lot and the next generation, because that's based on the assembly on platform.

So I think between all those we’ll continue to kind of closely monitored the cash situation, and we’ve talked about capital allocation, every quarter, what Fusen does with the Board.

We’ll do what’s most prudent in, both in terms of organic initiatives, like Pixalux, like our advanced packaging, plus technology buys in terms of like Uniqarta and then obviously, return to the dividend and optimistically share repurchases..

Yes, that's fantastic. No other questions again, congratulations on a great results and outlook. Thanks..

Thank you. We reached the end of our question and answer session. I'll turn the floor back over to Joe for any further or closing comments..

Thanks, Kevin. And thank you to our participants for joining today's call. We'll be presenting at several upcoming conferences over the coming months. As always, please feel free to follow up directly with any additional questions. Have a great day everyone. 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..