Kulicke & Soffa

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Kulicke & Soffa is a global leader in the design, manufacture, and sale of capital equipment and tools used to assemble semiconductor devices, with a recent pivot into advanced packaging solutions for high-growth applications such as AI.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The company operates in the semiconductor equipment industry, which is inherently cyclical, as demand for their products is linked to fluctuations in semiconductor production and spending cycles.

Business Overview:

Kulicke & Soffa (KLIC) is a key player in the semiconductor industry, primarily focused on the back-end assembly and packaging processes. They design and manufacture equipment used for bonding and packaging, providing high-precision and complex tooling solutions. They have a long history in the industry and have a global presence.

  • Revenue Distribution: KLIC’s revenue comes from three main segments:
    • Ball Bonding Equipment: The workhorse and highest revenue segment, provides solutions for connecting microchips to their packaging substrates.
    • Wedge Bonding Equipment: Focuses on interconnecting more complex applications, like power and microchips for automotive applications.
    • Advanced Packaging Solutions: Includes solutions in advanced packaging, such as flip chip and wafer-level packaging, driven by high growth areas of AI and chiplets.
  • Industry Trends:
    • The semiconductor industry is highly cyclical, with periods of growth and downturns.
    • There’s a global push toward advanced packaging technologies, driven by increasing demand for higher performance, power efficiency, and miniaturization of semiconductors especially in high growth segments like AI and EVs.
    • Technological innovations in semiconductor manufacturing techniques and materials, such as the growth of chiplets and heterogeneous integration, are pushing demand for advanced assembly and packaging.
    • Geopolitics such as the war in Ukraine and US-China trade tensions, among other factors have contributed to supply chain issues that significantly increased lead times and volatility for semiconductors.
  • Competitive Landscape:
  • The equipment market is quite consolidated and dominated by very big players that have the R&D, scale, and manufacturing abilities to have high barriers to entry.
  • The biggest competitors include ASM Pacific Technology (ASMPT), BE Semiconductor (Besi), and DISCO, companies which compete to a larger or lesser degree on most of the same products.
  • The company has a strong focus on innovation as the industry quickly moves towards new technologies and techniques.
  • What Makes KLIC Different?
  • KLIC offers high-precision, reliable equipment and tools which have an excellent track record, enabling their products to be a must have for semiconductor manufacturers
  • They have invested into R&D in newer technologies such as hybrid bonding, while still maintaining focus on their existing solutions, giving them a varied set of customers from both leading edge and more traditional clients.
  • Strong global footprint, giving a broad reach to customers and different market segments
  • Margins: * Over the past three quarters, profitability for the company has been hurt by reduced revenues in the industry wide slump, which decreased margins. * Their target for gross margin in the future is between 48-50% with operating expenses at approximately 25% of sales. * The industry is currently in a down cycle, and as margins are expected to be driven by volume, its likely margins will increase as demand recovers.

Financial Analysis:

  • Revenues:
  • Revenues have seen a large decrease in 2023 to roughly $1.1B compared to 2022 with a $1.7B revenue.
  • The decrease has been due to a drop in customer demand and a slowdown in new chip demand.
  • The latest earnings call and reports have been showing some signs of bottoming out, as customers in the industry start to recover and plan investments in capacity.
  • Geographically, the APAC region is their largest customer, generating around 80% of sales.
  • Profits: * Profits have dropped alongside revenues with net income being about 6.4% of sales at $77M for 2023, compared to 15.4% of sales at $267M in 2022. * Gross margin decreased to 46.3% in 2023 from over 50% in 2021 and 2022 due to supply chain issues and fixed costs. * The company has a strong operating cost structure that is more dependent on revenue than fixed expenses, meaning that as the industry improves and revenues rise, they are expected to achieve profitability.
  • Cash Flow:
  • The business has a large amount of cash on hand, about $580 million as of Q2-2024.
  • Free cash flow was positive in all of 2023, with about $205 million in Free Cash Flow over 2023, although was below the $320 million free cash flow of 2022 and $350 million of 2021
  • Balance Sheet:
    • Debt is kept at very low levels. Long-term debt is below $50 million.
    • Shareholder’s equity is strong at $1.2B
    • Strong current ratio near 6, indicating a strong balance sheet that can endure hardship.

Moat Assessment:

  • Moat Rating: 2 / 5: KLIC has a narrow moat, primarily due to switching costs and customer relations.

    • Switching Costs: A lot of their customers require high reliability for their processes, therefore, many have stuck with KLC’s products for a long time. Companies will not want to change manufacturing or processes if it might cause loss in production yield or performance.
    • Intangible Assets: the company has numerous trademarks and patents in the design and fabrication of highly complex tools and machines used in the semiconductor space, however the number of patents is very large and might not protect them from new technologies and competitors.
    • Cost Advantages: The cost advantage is small and is based on the long supply chain relations the company maintains. They have a broad base of manufacturing, design, and support facilities globally, but this can easily be replicated by competitors.
    • Network Effect: No network effect exists for this company.

  • Justification: Although the company has strong brand recognition, long-time customers, and some intellectual property, its competitive advantages aren’t very durable and could easily be diminished by new innovations, changes in the industry, and actions by competitors, thus its economic moat is not wide.

Risks to the Moat and Business:

  • Technological Obsolescence: The semiconductor industry is rapidly evolving, and new manufacturing technologies could quickly render their current technologies and equipment obsolete and make their offerings less relevant to customers.
  • Cyclicality: Their business depends greatly on the semiconductor cycle, which is highly volatile and can cause sharp and unpredictable downturns in revenue.
    • For example: The most recent earnings miss was partially caused by weaker demand and economic conditions in the semiconductor industry due to inventory corrections.
  • Competition: The competitive landscape in assembly and packaging equipment is quite intense, as competitors are willing to compete aggressively for key customers. Furthermore, competitors have large amounts of cash and can quickly change their R&D priorities.
  • Supply Chain Disruptions: The global supply chain is quite fragile which has an adverse effect on the company. They need to diversify their supplier base and also find ways to manufacture parts and equipment on their own.
  • Geopolitical Risks: The recent tensions between US and China has meant that companies might be subject to export controls, and other laws. This can cause unexpected difficulties in doing business.

Business Resilience:

  • Diversified Customer Base: The company serves a broad range of customers across different areas of the semiconductor market, which can partially help the volatility of single industry and customer contracts.
  • Technological Adaptability: While it is a risk that they can fall behind, management is also proactive with their R&D efforts to adopt new technologies to meet the changing demands of the market.
  • Strong Balance Sheet: with little debt, and a good cash balance, they can weather the storms of the semiconductor industry and any negative impact due to global turmoil.
    • Management also stated in their last conference call that they intend to buy back stock with the excess cash in the short term.
  • Global Presence: The presence of factories and offices in countries across the globe means they can access talent and also make deals with local partners more efficiently.

Understandability Assessment:

  • Understandability: 3 / 5

    • While KLIC is involved in complex technologies, it has a somewhat straightforward revenue and profit model- as a provider of capital equipment to the semiconductor industry, the products and services are reasonably easy to understand. The biggest difficulty in understanding the business model is understanding the competitive landscape, the volatility in the semiconductor industry, and the importance of specific technologies.