Kulicke & Soffa Industries, $KLIC, Crushes Earnings But Continues To Sandbag, $6 EPS '21, $6.75 EPS '22
SemiAnalysis has been clamoring about Kulicke & Soffa Industries ($KLIC) on Twitter since the end of last year. Our clients were getting recommendations with models and further insights around the same time frame. In April we released a note publicly. By doing regular channel checks we found that lead times were upwards of 42-52 weeks. Advanced Semiconductor Engineering ($ASX) a leading OSAT (Outsourced Assembly and Test) firm confirmed this in their Q2 call.
Since then, it has only gotten more bullish. KLIC released earnings, crushing expectations yet again and raising guidance massively. ASE stated that lead times are even longer than they were last quarter. Our sources indicate they are over 52 weeks for the main business categories of wire bonders and testers. More fabs have been announced, especially in China. This has pushed our estimate of additional capacity on the trailing edge. Nodes that are manufactured on 28nm or larger process technologies has gone from 200,000 new WPM (wafers per month) in 2023 up to 270,000 WPM. This combined with the massive capex growth in 2022 and 2023 from ASE, Amkor, and up and coming Chinese OSAT, bodes very well for wire bonder demand.
Furthermore, the mini-LED business and in the future, micro-LED, is doing much better than expected. It’s coming in at around $75M this year, $100M next year, and $150M in 2023. The business they call advanced packaging is also doing quite well. While we don’t agree with the term, as it doesn’t involve proper 2.5D or 3D, that is an argument for another day. There is also an outside chance that new battery production methods Tesla is developing will also use KLIC products.
KLIC is guiding for $5.7 EPS for the year, but we have them at $6. The demand signals and ability to supply the market seem ripe for another beat next quarter. Furthermore, next year KLIC was guiding at $1.2B revenue, but now they are at $1.5B. This is also a bit of a sandbag. They will continue to ship at the current run rate throughout all of 2022 and easily hit about $6.75 EPS.
This management team likes to sandbag, they came into the year at and raised guidance for the year 4 times already. At the Q1 call, a month before Q2, in the Q2 call, and again recently at Q3. While it seems maddening, there is a valid reason for this. In previous cycle, $KLIC has gotten cut in half or worse. Wall Street is still pricing them like 2022 and 2023 will be down years. They haven’t realized that this is a secular boom and that there needs to be a wholesale rerating.
Operating margins are amazing, revenue growth is still coming in this year and next year. 2023 continues to look strong because the trailing edge is out growing the leading edge. The cash generation coming in is absurd. They have nearly $635M in cash, cash equivalents, and short-term investments on the balance sheet. Furthermore, they will be generating a huge amount of cash over the next two years. The team says they are looking for ways to return cash and hinted at an increase in buy back activity or a higher dividends. They already upped the rate of share repurchases in Q2.
What more is there to say besides there is a secular within a cyclical. Many of the biggest mega trends we see, especially with IoT, Edge, 5G, and Automotive silicon content, rely on large amounts of trailing edge silicon. These are packaged by majority, with KLIC wire bonders. The semiconductor cycle has scarred many investors, which is causing a high-quality firm with leading market share and amazing margins to trade at a steep discount. The management sandbagging on future earnings doesn’t help. They want to keep targets low so they can beat and raise for the next 2 years. Despite wire bonders slowly losing share of total package type over time, the combination of these new growth areas as well as trailing edge out growing leading edge is a big catalyst for KLIC.
This article was originally published on SemiAnalysis on August 5th 2021.
Clients and employees of SemiAnalysis may hold positions in companies referenced in this article.
Dylan, thank you very much for this article. I am a SemiCap fan and I discovered you on Twitter. I have really been enjoying your articles. This one on KLIC is interested. I performed my own valuation of it this morning. KLIC does look intriguing. What do you think about its Moat, Senior Leaders and who are its competitors?
Thanks a bunch and I look forward to reading your thoughts on this and future posts!