Semiconductor production equipment company Kulicke & Soffa (NASDAQ: KLIC) reported results in line with analysts' expectations in Q3 FY2023, with revenue down 48.7% year on year to $190.9 million. However, next quarter's revenue guidance of $200 million was less impressive, coming in 4.64% below analysts' estimates. Kulicke and Soffa made a GAAP profit of $4.16 million, down from its profit of $119 million in the same quarter last year.
Kulicke and Soffa (KLIC) Q3 FY2023 Highlights:
- Revenue: $190.9 million vs analyst estimates of $190.1 million (small beat)
- EPS (non-GAAP): $0.55 vs analyst estimates of $0.32 (69.8% beat)
- Revenue Guidance for Q4 2023 is $200 million at the midpoint, below analyst estimates of $209.7 million
- Free Cash Flow was -$1.55 million compared to -$8.58 million in the previous quarter
- Inventory Days Outstanding: 206, down from 229 in the previous quarter
- Gross Margin (GAAP): 47.2%, down from 51.2% in the same quarter last year
Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices
Kulicke & Soffa was founded in 1951 by Frederick Kulicke Jr. and Albert Soffa, and the company was incorporated in 1956. With a 1971 NASDAQ listing, Kulicke & Soffa became one of the first technology companies on the exchange.
The company’s key products are equipment and tools used in the interconnect processes of semiconductor manufacturing. The interconnect process is the wiring system that connects transistors and other components on a chip. This step in manufacturing is important because these connections can be a limiting factor to chip performance, as electrical resistance of wires increases as they are made smaller and thinner to accommodate more transistors.
KLIC’s products therefore aim to improve performance and increase power efficiency amid smaller form factors. One example is the company’s ball bonder, which enables precise electrical interconnections between a bare silicon die and the lead frame of the package it is placed in during semiconductor fabrication. Another example is the company’s wedge bonder, which uses ultrasonic power and force to form resilient bonds.
Competitors offering semiconductor equipment and packaging materials products include ASM Pacific Technology (SEHK:522), BE Semiconductor Industries (ENXTAM:BESI), and Hanwha Precision Machinery.Sales Growth
Kulicke and Soffa's revenue growth over the last three years has been very strong, averaging 38.3% annually. But as you can see below, its revenue declined from $372.1 million in the same quarter last year to $190.9 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Even though Kulicke and Soffa surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 48.7% year on year. This could mean that the current downcycle is deepening.
Kulicke and Soffa may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 30.1% next quarter, analysts are expecting revenue to grow 7.89% over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Kulicke and Soffa's DIO came in at 206, which is 85 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Kulicke and Soffa's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 47.2% in Q3, down 4.1 percentage points year on year.
Kulicke and Soffa's gross margins have been trending down over the last 12 months, averaging 48.1%. This weakness isn't great as Kulicke and Soffa's margins are already slightly below the industry average and falling margins point to potentially deteriorating pricing power.
Profitability
Kulicke and Soffa reported an operating margin of 12.7% in Q3, down 21.9 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Kulicke and Soffa's operating margins have been trending down over the last year, averaging 15.4%. This is a bad sign for Kulicke and Soffa, whose margins are already among the lowest for semiconductors. The company will have to improve its relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering Kulicke and Soffa expect earnings per share to be relatively flat over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Kulicke and Soffa's free cash flow came in at -$1.55 million in Q3, down 102% year on year.
As you can see above, Kulicke and Soffa produced $165.1 million in free cash flow over the last 12 months, a solid 17.7% of revenue. This FCF margin is above average for semiconductor companies and should put Kulicke and Soffa in a relatively strong position to invest in future growth initiatives.
Kulicke and Soffa's average return on invested capital (ROIC) of 50.3% over the last five years implies that it has a strong competitive position and was able to invest in profitable growth over time.
Key Takeaways from Kulicke and Soffa's Q3 Results
Sporting a market capitalization of $3.17 billion, Kulicke and Soffa is among smaller companies, but its more than $711.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
We were impressed by Kulicke and Soffa's strong improvement in inventory levels. We were also excited that its earnings growth outperformed Wall Street's expectations. On the other hand, its underwhelming revenue guidance for next quarter was disappointing and its operating margin declined. Overall, this was a mediocre quarter for Kulicke and Soffa. The stock is flat after reporting and currently trades at $55.17 per share.
Is Now The Time?
Kulicke and Soffa may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. We think Kulicke and Soffa is a solid business. We'd expect growth rates to moderate from here, but its superb revenue growth implys that it's winning market share over the last three years. And while its operating margins reveal subpar cost controls compared to other semiconductor businesses, the good news is its high ROIC suggests it is well run and in a strong position for profitable growth and its solid free cash flow generation gives it re-investment options.
Kulicke and Soffa's price-to-earnings ratio based on the next 12 months is 28.4x. There are definitely things to like about Kulicke and Soffa and looking at the semiconductors landscape right now, it seems that the company trades at a pretty interesting price point.
Wall Street analysts covering the company had a one year price target of $56.8 per share right before these results, implying that they saw upside in buying Kulicke and Soffa even in the short term.
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