Introduction
Kulicke & Soffa (KLIC, Financial) is an industry leader in wire bonding, the technology used to package 80% of all semiconductors today. The technology itself is not new. Kulicke & Soffa was founded in 1951, and in 1959, it developed the first commercial wire bonder with the help of Bell Labs, making it one of the founding companies of this critical sector. Co-founder Frederick Kulicke, after whom the company is named, was the company’s first CEO. He was succeeded by his son C. Scott Kulicke, who oversaw the company until 2010. Then leadership was passed to Bruno Guilmart, before giving way to current CEO Fusen Chen in 2016.
In 2010, the company moved its headquarters to Singapore following a trend decades in the making - that of semiconductor production and assembly steadily moving to east Asia.
Where the company is today
As of this writing, Kulicke & Soffa dominates its market with a 65% market share. The company effectively forms a duopoly with ASM Pacific, which has an estimated 20% to 25% market share.
The company is not resting on its laurels. Kulicke & Soffa has pushed forward with next-generation technologies such as hybrid bonding and thermo-compression bonding, both higher-priced solutions enabling leading-edge advanced packaging applications. While this is a competitive segment, the company’s technology chops and deep customer relationships have allowed it to go from strength to strength.
More recently, the company entered the advanced mini and microLED solutions market, which is poised for high growth as both technologies are expected to replace LCD screen technology over time.
The wire bonding market is underrated
While traditional end-markets for wire bonding continue to perform, the market is still underrated as a whole.
With Moore’s law slowing down, chip transitions are no longer happening as quickly in terms of die shrink (the process of creating a circuit using advanced fabrication processes). With chip scaling becoming more difficult on the front-end, newer packaging techniques can help systems perform better with power, speed and energy efficiency, making up some of the slack from Moore’s law.
Many semiconductor designers are also moving towards a "chiplet" architecture where chip components are broken up into subcomponents. These subcomponents can be mixed-and-matched with memory in different specialized combinations - a trend that bodes well for capital expenditure on packaging.
Beyond increased unit volumes, Kulicke & Soffa’s ball bonder machine technology continues to find new applications, and this holds true even at the cutting edge, where ball bonder machines have found uses with multi-chip packages in emerging fields such as 5G packages and 3D memory.
Given the technology’s versatility, I believe investors can expect continued strength in sales over the next three to five years and a longevity that many continue to underestimate.
New avenues of growth
Let’s say, hypothetically, that traditional ball bonder sales fall off after this strong period. Kulicke & Soffa has been cultivating several new growth avenues in four distinct areas: advanced packaging, battery assembly for electric vehicles, mini/micro LED equipment and after-market services. Let’s go through each of these to see how they could contribute to the company's long-term.
The cutting edge: leading-edge semis and advanced packaging
Besides ball bonding technology, Kulicke & Soffa is also strengthening its portfolio of advanced packaging equipment. The company has close partnerships with Intel (INTC, Financial), with Intel looking to improve its chiplet architecture to extract more power and performance out of its chipsets.
Although leading-edge advanced packaging applications is a more competitive space than ball bonding, it does appear that the company is beginning to gain traction here.
The red hot electric vehicle space
Kulicke & Soffa is no stranger to the automotive market. The company has long had an automotive-focused business - since 2006, in fact, when it first unveiled its tools for Power ICs. Kulicke & Soffa followed up its involvement in the sector by unveiling battery package solutions in 2016.
In the third and fourth quarters of 2022, the auto segment alone produced $88 million in revenue, accounting for roughly 15% of equipment revenue.
And this is just the beginning. Electric vehicles have roughly two times the semiconductors of a traditional gas-powered car today, and autonomous vehicles will take that even further, to eight to 10 times the semiconductors per car.
The company already has a foothold in the space. Kulicke & Soffa has been offering cylindrical battery assembly solutions since 2016 (Tesla (TSLA, Financial), a top 10 customer, began using them in 2020). The company is now offering prismatic battery solutions as well - a technology which is used by the bulk of other EV OEMs.
Mini and micro LEDs: the future of screen technology
This is perhaps the most important growth avenue of the lot, and the one with maximum opportunity for diversification. Kulicke & Soffa identified the emerging miniLED market as an opportunity back in 2017, having previously supplied the general LED market over the prior decade.
What is the difference between the two technologies? Traditional LEDs light up the entire back of a display surface, whereas miniLEDs have local dimming/brightness controls that can be adjusted in relation to other parts of the screen - making for deeper colors and contrast.
Though the technology is highly sophisticated and expensive, miniLEDs are gaining acceptance in the highest-end devices - most notably with the 2021 iPad Pro and other high-end televisions. As the technology evolves and improves, it could become industry standard in other mass market PCs, tablets and phones.
So how did the company navigate this space? Kulicke & Soffa repurposed its wire-bonder technology into its first generation miniLED placement equipment called Pixalux in 2019, which places a light-emitting diode into the display substrate. This grew from a $56 million business to a $188 million business as of 2021.
In the third quarter of 2022, Kulicke & Soffa went ahead and acquired Advanced Jet Automation, a dispensing equipment manufacturer that expanded the company’s total available market by $2 billion by providing it with adjacencies in advanced display, advanced packaging and electronics assembly. Advanced Jet Automation’s technology is currently deployed alongside Pixalux, supporting high volume mini-LED production.
This impressive growth is expected to continue - between 2021 and 2024, the company estimates mini and microLED wafers are expected to grow at a 55% annualized growth rate.
After-market products and services
Last but not least, like most other semiconductor equipment manufacturers, Kulicke & Soffa has continually developed more after-market products and services, with a 50/50 split between consumables used in production and spares, services and refurbishments - bundled with its KNEXT software for predictive maintenance and advanced process control.
After-market products and services are less volatile and higher-margin than the equipment segment, with an operating margin in the mid-20% range. During the “down” year of fiscal 2020, this segment managed to make up 25.95% of all sales, but in the 2021 boom in equipment sales, that percentage fell to 13.5%. During an average year, this segment would account for 20% of all sales.
Another factor to take into consideration is that the current equipment sales boom is significantly growing the overall install base, and machine utilization is at all-time highs. This bodes well for the aftermarket business, which should see tailwinds from these above-trend sales years for years to come.
Financials and valuation
Let’s talk about valuation. Kulicke & Soffa trades at 7.5 times trailing 12-month earnings. Notably, Kulicke & Soffa’s management had built up its cash reserves to nearly $800 million entering this year, but has recently turned on the spigots for share repurchases.
After repurchasing a token amount in late 2021, management expanded its share repurchase program to $400 million and adopted an accelerated $150 million repurchase program in March 2022, with the goal of $800 million in share repurchases through August 2025. Kulicke & Soffa quickly retired 4% of shares outstanding at an average price of $53.68 per share, which is above today’s price of $52.78.
During its fiscal year ended Oct. 1, 2022, the company repurchased a total of approximately 2.78 million shares of common stock at a cost of approximately $132.8 million. Additionally, the company partnered with an investment bank to repurchase an additional $150 million of the company’s common stock. These two repurchases are comparable with the $250 million of repurchases over the last three fiscal years ending September 2021.
My target valuation for this stock is $100. I have based this estimate on the following assumptions:
- Kulicke & Soffa will continue to repurchase stock at these low levels.
- Growth will outperform management’s conservative targets, not just because of the growth of the core business but also because of newer segments, especially LED.
Since stock multiples may remain constrained for a while, the company’s ability to maintain margins and repurchase shares is paramount to my bullish case.
