Kulicke and Soffa (KLIC)

Semiconductor production equipment company Kulicke & Soffa (NASDAQ: KLIC) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 5.9% year on year to $162 million. Next quarter’s revenue guidance of $145 million underwhelmed, coming in 23.2% below analysts’ estimates. Its non-GAAP loss of $0.52 per share was significantly below analysts’ consensus estimates.

Company Overview

Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices

Competitors offering semiconductor equipment and packaging materials products include ASM Pacific Technology (SEHK:522), BE Semiconductor Industries (ENXTAM:BESI), and Hanwha Precision Machinery.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Kulicke and Soffa’s 4.2% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the semiconductor sector and is a poor baseline for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Kulicke and Soffa’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 17.2% annually.

This quarter, Kulicke and Soffa missed Wall Street’s estimates and reported a rather uninspiring 5.9% year-on-year revenue decline, generating $162 million of revenue. Adding to the miss, the drop in sales could mean that the current downcycle is deepening. Company management is currently guiding for a 20.2% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 17.6% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and suggests its newer products and services will spur better top-line performance.

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 116, which is 40 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Kulicke and Soffa’s unit economics are reasonably high for a semiconductor business, pointing to a lack of meaningful pricing pressure and its products’ solid competitive positioning. As you can see below, it averaged an impressive 49.2% gross margin over the last two years. That means for every $100 in revenue, roughly $49.21 was left to spend on selling, marketing, R&D, and general administrative overhead.

This quarter, Kulicke and Soffa’s gross profit margin was 24.9%, down 19.6 percentage points year on year. On a wider time horizon, however, Kulicke and Soffa’s full-year margin has been trending up over the past 12 months, increasing by 5.6 percentage points. If this move continues, it could suggest an environment where the company has better pricing power and stable or shrinking input costs (such as raw materials).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Kulicke and Soffa’s high expenses have contributed to an average operating margin of negative 5.3% over the last two years. Unprofitable semiconductor companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Analyzing the trend in its profitability, Kulicke and Soffa’s operating margin decreased by 16.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Kulicke and Soffa’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Kulicke and Soffa generated a negative 52.3% operating margin. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Kulicke and Soffa, its EPS declined by 7.9% annually over the last five years while its revenue grew by 4.2%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

We can take a deeper look into Kulicke and Soffa’s earnings to better understand the drivers of its performance. As we mentioned earlier, Kulicke and Soffa’s operating margin improved this quarter but declined by 16.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Kulicke and Soffa reported EPS at negative $0.52, up from negative $0.95 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street expects Kulicke and Soffa’s full-year EPS of $0.54 to grow 213%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Kulicke and Soffa has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 11.8%, subpar for a semiconductor business.

Taking a step back, an encouraging sign is that Kulicke and Soffa’s margin expanded by 6.9 percentage points over the last five years. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Kulicke and Soffa’s free cash flow clocked in at $77.98 million in Q1, equivalent to a 48.1% margin. Its cash flow turned positive after being negative in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Kulicke and Soffa’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 17.6%, slightly better than typical semiconductor business.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Kulicke and Soffa is a profitable, well-capitalized company with $581.5 million of cash and $36.28 million of debt on its balance sheet. This $545.2 million net cash position is 33.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Kulicke and Soffa’s strong improvement in inventory levels. On the other hand, its revenue guidance for next quarter missed significantly and its revenue fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 5.8% to $29.90 immediately after reporting.

Updated: May 21, 2025 at 10:26 PM EDT

Before making an investment decision, investors should account for Kulicke and Soffa’s business fundamentals and valuation in addition to what happened in the latest quarter.

Kulicke and Soffa falls short of our quality standards. To kick things off, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its rising cash profitability gives it more optionality, the downside is its declining operating margin shows the business has become less efficient. On top of that, its operating margins reveal poor profitability compared to other semiconductor companies.

Kulicke and Soffa’s P/E ratio based on the next 12 months is 19.3x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $39.60 on the company (compared to the current share price of $32.50).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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