No Surprises In Kulicke and Soffa's (NASDAQ:KLIC) Q3 Sales Numbers But Quarterly Guidance Underwhelms

Semiconductor production equipment company Kulicke & Soffa (NASDAQ: KLIC) reported results in line with analysts' expectations in Q3 FY2023, with revenue down 48.7% year on year to $190.9 million. However, next quarter's revenue guidance of $200 million was less impressive, coming in 4.64% below analysts' estimates. Kulicke and Soffa made a GAAP profit of $4.16 million, down from its profit of $119 million in the same quarter last year.

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Fusen Chen, Kulicke & Soffa's President and Chief Executive Officer, stated, "Utilization rates and demand have strengthened in our leading core business, which remains closely aligned with long-term assembly trends in high-volume and power semiconductor applications. Additionally, we have reached new customer and technical milestones within our advanced display and advanced packaging portfolios."

Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

Kulicke and Soffa's revenue growth over the last three years has been very strong, averaging 38.3% annually. But as you can see below, its revenue declined from $372.1 million in the same quarter last year to $190.9 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Even though Kulicke and Soffa surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 48.7% year on year. This could mean that the current downcycle is deepening.

Kulicke and Soffa may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 30.1% next quarter, analysts are expecting revenue to grow 7.89% over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Kulicke and Soffa's DIO came in at 206, which is 85 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from Kulicke and Soffa's Q3 Results

Sporting a market capitalization of $3.17 billion, Kulicke and Soffa is among smaller companies, but its more than $711.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

We were impressed by Kulicke and Soffa's strong improvement in inventory levels. We were also excited that its earnings growth outperformed Wall Street's expectations. On the other hand, its underwhelming revenue guidance for next quarter was disappointing and its operating margin declined. Overall, this was a mediocre quarter for Kulicke and Soffa. The stock is flat after reporting and currently trades at $55.17 per share.

Kulicke and Soffa may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.