KLIC - Kulicke And Soffa Industries: Progress And Setbacks At The Same Time

2023-05-08 14:02:37 ET

Summary

• KLIC released its latest report and it contained some good news, but it also contained what many will agree was bad news.
• KLIC seems to believe the bottom is in, but it also lowered its outlook once again, which suggests weaker-than-expected demand.
• Multiples are on the high side, which could be excused if fast growth returns, but could become a problem if it does not.
• KLIC needs faster growth to bring down multiples or the stock price needs to go lower to compensate.

Kulicke and Soffa Industries ( KLIC ), a supplier of equipment and other solutions for the semiconductor and LED markets, had some positives and some negatives to share in its latest earnings report. On the one hand, there is increasing evidence KLIC has hit bottom after a major downturn and KLIC is on the road to recovery. On the other hand, the outlook suggests the road to recovery could be longer and more difficult to traverse than anticipated. Why will be covered next.

KLIC surpassed estimates with its Q2 FY2023 report

KLIC certainly had some good things to say in its latest report. Consensus estimates, for instance, were expecting non-GAAP EPS of $0.26 on revenue of $171M in the Q2 FY2023 report. These estimates were slightly above the midpoint of guidance from KLIC as shown below.

Source: KLIC

However, KLIC did better by reporting GAAP EPS of $0.26 and non-GAAP EPS of $0.38 on revenue of $173M, mostly due to a better product mix. Non-GAAP EPS still declined by 80.5% YoY and revenue declined by 55% YoY, although the former did increase by 2.7% QoQ. Note that share buybacks gave EPS a lift. KLIC finished with cash, cash equivalents and short-term investments of $734.1M on the balance sheet. The table below shows the numbers for Q2 FY2023.

Source: KLIC

Guidance calls for Q3 FY2023 revenue of $170-210M, a decrease of 48.9% YoY, but also an increase of 9.8% QoQ at the midpoint. The forecast calls for GAAP EPS of $0.23, plus or minus 10%, a decline of 88.4% YoY at the midpoint, and non-GAAP EPS of $0.32, plus or minus 10%, a decline of 84.7% YoY at the midpoint.

Source: KLIC

The latest guidance is noticeably better than the one before. Furthermore, management believes the quarterly numbers will continue to get better in the coming quarters with the trough in the rearview. From the Q2 earnings call:

"At this point, our delivery schedule for higher-volume systems provides confidence we are past trough. We now see an uptick in quote activity which supports further improvements over the coming quarters.

Overall, our longer-term industry outlook remains fairly consistent and aligned with third-party market forecasts. We continue to anticipate positive semiconductor unit growth in fiscal year 2023 and higher levels of capacity and technology-related demand through fiscal year 2024."

A transcript of the Q2 FY2023 earnings call can be found here .

KLIC also provided a preview of Q4 FY2023 by suggesting a sequential increase in revenue of about 10%.

"Looking into September, we currently anticipate seeing sequential revenue growth of approximately 10% over our June quarter's expectations."

KLIC expects FY2023 to end up ahead of FY2019 when all is said and done. Keep in mind KLIC posted GAAP EPS of $0.18 and non-GAAP EPS of $0.46 on revenue of $540.1M in FY2019.

"We expect our fiscal - relative fiscal year '23 financial performance to also significantly exceed our fiscal year '19 results."

KLIC has posted revenue of $349.3M halfway through FY2023. The outlook suggests Q3 revenue of $170-210M and another 10% QoQ increase in Q4, which implies FY2023 revenue of around $748M at the midpoint of guidance.

Earnings estimates have been adjusted to account for the latest updates from KLIC. Estimates project non-GAAP EPS of $1.47-1.57 on revenue of $748-749M in FY2023, which represent YoY declines of 78.9-80.3% and 50.2-50.3%, respectively, since KLIC earned $7.45 on revenue of $1,503.6M in FY2022.

The outlook has gotten worse

The bottom seems to be in and that is good to hear. However, there were also some less than encouraging developments to note. It's thus worth mentioning that KLIC lowered its FY2023 outlook with its latest updates. Keep in mind that this is not the first time this has happened. KLIC called for FY2023 revenue of around $900M at the start of FY2023, which was then adjusted downwards to around $840M at the Q1 earnings call .

The latest commentary from management midway through FY2023 is now calling for FY2023 revenue of around $748M. Further downgrades are not impossible. In addition, book-to-bill remains below one, which means demand still leaves a lot to be desired. All this suggests that while KLIC is on the road to recovery, the slope of the recovery could be a lot flatter than previously suggested. It may take a lot longer to fully recover from the latest downturn to get back in position to challenge the most recent highs.

The above could explain why the market appears to have changed its mind about KLIC the day after the Q2 report. The stock rose at first, increasing its value by more than 4% at one point, but it ended the day with a loss of 3.8%. The chart below shows how the stock has nearly wiped out all its gains from earlier in the year after the recent slide. KLIC appreciated by as much as 32.9% in early 2023, but gains have whittled down to 5.7% YTD.

Note that short interest has come down along with the recent decline in the stock. According to the Nasdaq, short interest peaked in 2023 at 8.4M shares on 2/28, but it fell to 7.3M shares on 4/14 according to available data , a decline of 14% in about 6 weeks. This translates to a short float of 13.1%, which is still relatively high despite the decline.

Valuations are going up

The possibility that KLIC may need a lot more time to recover has implications for how KLIC is valued. For instance, KLIC trades at 30.9 times forward non-GAAP earnings with a trailing P/E of 11.6. Keep in mind that trailing multiples are benefiting from KLIC posting record earnings in the past, which is no longer the case. While most would agree a multiple in the thirties is on the high side, the assumption was that this multiple was set to come down with growth set to accelerate in the coming quarters.

An argument could be made that a 30x multiple is not unreasonable assuming earnings, which have collapsed in the past few quarters, are set for a strong recovery in FY2023-FY2024. However, this becomes harder to do in light of the latest updates, which suggests a quick recovery out of the recent downturn could be harder to come by. The successive lowering of KLIC's FY2023 outlook does not inspire confidence.

Source: Seeking Alpha

Investor takeaways

The market gave a thumbs up to the most recent report, only to change its mind on second thought. On the one hand, the fact that KLIC is on the road to recovery after a massive downturn is undoubtedly positive. Quarterly revenue is forecast to increase sequentially for the rest of FY2023, recouping some of the huge losses in recent quarters.

On the other hand, for KLIC to lower its outlook multiple times is cause for concern. The latest outlook suggests KLIC is being confronted with demand that is weaker than anticipated, which will make it harder for KLIC to get out of the hole it finds itself in after the big drops in the top and the bottom line in recent quarters.

The latest outlook two quarters into the year calls for FY2023 revenue to end up around $748M, way below the $900M KLIC suggested at the start of FY2023 and less than half of what KLIC managed to pull in the preceding year. FY2023 earnings are projected to drop by 78-80% YoY, although against a very high base in FY2022.

KLIC could be excused for multiples that are on the high side, as long as the top and the bottom line are set for a relatively quick recovery. However, the latest color from KLIC suggests it could take a lot longer to get back to the record earnings of FY2021-2022 than anticipated. If multiples are not coming down because earnings are not going up fast enough, then it may be up to the stock price to take a haircut to bring down multiples instead.

I am neutral on KLIC as stated in a previous article . That article cautioned KLIC may have to lower its forecast, which turned out to be prescient as that is exactly what KLIC has done with its latest report. The stock rallied earlier in the year in large part because of the prospect of a recovery on the horizon, but the stock has reversed course with the prospect of a recovery that may be a lot more lackluster than expected.

Bottom line, there is reason to believe the stock could continue to struggle like it has in the past few months. The slide in the stock could continue with multiples where they are and if the quarterly numbers don't improve faster than they have. KLIC has work to do in terms of boosting growth, because if it does not, the stock is likely heading lower.

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