A Very Warm Welcome Back to Kulicke & Soffa

 | Feb 07, 2017 | 10:00 AM EST
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In the latest one-year period, shares of Kulicke & Soffa (KLIC) are up 74%. Year to date, the stock is up 25%, and it's only February.

Kulicke & Soffa operates in the less glamorous backwoods of the semi equipment industry. The company is known for manufacturing wire-bonding machines that are used to connect the semiconductor die to the outside world. A typical 300 mmm wafer holds approximately 148 20mm x 20mm dies. Each die needs to be carefully removed from the underlying substrate, glued into a package and wired to the outside world using microscopic gold or copper filament.

As die size has shrunk, KLIC has had to invent new ways to connect these tiny chips to the outside world. The company has introduced several new advanced packaging techniques, which are poised to become a much larger part of total revenue.

After the former CEO Scott Kulicke retired in 2010, a lot of investors (including myself) lost track of the company. (The guy was a legend!) That same year, the company moved its headquarters to Singapore and lost a lot of its institutional analyst coverage, as the big sell side firms consolidated their research coverage on large-cap names after the financial meltdown. Right now, only four sell side firms cover the stock. But the company seems to be making a comeback.

Effective Oct. 31, Fusen Chen became President and CEO of K&S. Previously, Mr. Chen was CEO of Mattson Technology (MTSN) , another long-forgotten semi equipment maker. Mattson was sold to Chinese private equity firm E-Town Dragon in 2015. Chen turned around Mattson after years of losses and is expected to do that same at K&S.

On Feb. 2, Kulicke and Soffa reported first-quarter fiscal 2017 earnings. Earnings of $0.22 were $0.10 better than the consensus estimate. Revenue rose 37.9% to $149.6 million versus the $140 million estimate. This was the strongest December quarter in eight years.

Wedge bonder equipment net revenue increased 35.7%. Ball bonder equipment net revenue increased 5.1%. Gross margins were 45.7%. The company had $86.6 million worth of equipment in backlog. Its advanced packaging solutions are expected to be 15% of revenue this year vs. 10% last year.

Management guided second-quarter revenue between $185 million and $195 million, above the $155 million consensus estimate. For the year, analysts are looking to total revenue of $694 million and earnings of $1.19.

As the sheer number of semiconductors grows, the amount of packaging needed for those chips keeps growing. As die get impossibly small, the equipment industry needs increasingly complex methods to connect those chips to the outside world.

According to VLSI Research and Gartner, there were 3.0 trillion semiconductors manufactured in 1995. That number reached 14 trillion in 2014 and is expected to grow to 23 trillion by 2020. Overall, semiconductor units are expected to grow 9% through 2020. All those chips need some kind of package and K&S is there to help.

K&S estimates there are 145,000 wire bonding machines in the marketplace, and 80% of all semiconductors are still wire-bonded. The company has an estimated 60% market share of the wire bonding market. K&S has an installed base of over 90,000 machines!

According to K&S, the market for advanced packaging solutions is expected to grow from $450 million in 2016 to $900 million by 2020. Likewise, the core back end assembly business, such as wire and wedge bonders, is expected to grow from $780 million to $850 million and electronic assembly is growing to $700 million from $300 million.

The company believes its served available market is growing from $1.53 billion in 2016 to $2.45 billion by 2020.

Valuing KLIC is nearly impossible. The company is highly cyclical, and is often the first name in the semiconductor industry to feel the effects of a slowdown (or pick up). Customers can cancel equipment orders instantly, so backlog can dry up overnight, and the stock is extremely volatile.

Only those with a strong tolerance for risk (or those with a death wish) venture near this stock, but K&S is great name to follow if you own other names in the equipment industry. Welcome back, KLIC.

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