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Technology Stocks : Kulicke and Soffa -- Ignore unavailable to you. Want to Upgrade?

To: Thomas Babb who wrote (3212)	1/30/1999 1:40:00 AM
From: Darin	Respond to of 5482

To All, KLIC: REPORTS BETTER THAN EXPECTED 1Q99, BOOKINGS ENVIRONMENT IS IMPROVING, BREAK-EVEN IS ON THE HORIZON, WE ARE RAISING OUR RATING TO ACCUMULATE FROM HOLD. Subject: Kulicke & Soffa (KLIC-$26 3/4)--OTC SEMICO INI COM EPS OPINION Current: ACCUMULATE Analysts: John W. Pitzer (212) 778-5252 Prior: HOLD Risk: MODERATE 12-Month Target Price: to $32 from $18 Ind. Div.: -- Yield: -- Shares: 378.1 mil. 52-Wk.Range: 40-21 EPS FY Year P/E 1Q 2Q 3Q 4Q Actual 9/98 ($0.23) NM $0.29 $0.39 ($0.13) ($0.52) Current 9/99E ($0.57)E NM ($0.38)A ($0.30)E ($0.05)E $0.15E Prior 9/99E ($1.00)E NM ($0.57)E ($0.38)E ($0.14)E $0.08E Current 9/00E $ 1.50 17.8 Prior 9/00E $ 1.20 INVESTMENT HIGHLIGHTS: (1) KLIC reported 1Q99 (Dec). EPS $(0.38) was better than ours and street expectations of ($0.57) and ($0.45) respectively. Upside in earnings due to better revenue and margins. (2) Order environment is improving in 2Q99 with the expectation of double digit sequential growth. (3) The company expects sequential improvement in revenue, bookings and EPS for each quarter in 1999. (4) We are raising our estimates for FY99 and FY00 of ($1.00) and $1.20, respectively, to ($0.37) and $1.50,respectively. (5) We are raising our rating to Accumulate from Hold due to improving business conditions and our ability to model a break-even quarter. (6) We have raised our price target to $32 from $18 which represents 20 times our 2000 EPS estimate of $1.70. DISCUSSION: KLIC reports 1Q99. KLIC reported better than expected results for 1Q99 (Dec.). Revenue and EPS were $61.2 million and ($0.38) compared to our estimate of $60.3 million and ($0.57). Street consensus for the quarter was ($0.45). Upside to our estimates was driven by slightly higher revenue and better margins-as the company did an excellent job on cost controls. Table 1 provides a breakdown of the operating results. Table 1: Kulicke & Soffa - 1Q99 Results 1Q99A 1Q98E 4Q98A 3Q98A Revenue $61.2 mil $60.3 mil $76.2 mil $91.7 mil Gross Margin 26.4% 24.5% 20.1% 32.9% Operating Margin (-16.8)% (21.5)% (21.2)% (3.5)% Net Income ($8.8) mil ($13.4) mil ($18.3) mil ($3.1)% Operating EPS ($0.38) ($0.57) ($0.52) ($0.13) Reported EPS ($0.38) ($0.57) ($0.79) ($0.13) Source: Company Reports, Prudential Securities Incorporated Estimates. Bookings deteriorated slightly in 1Q99 but visibility is improving. Gross bookings for 1Q99 were $60.0 million, inclusive of approximately $9 million in cancellations. Book to bill in the quarter was just under parity at 0.98 and backlog at the end of 1Q99 was $44 million. Although bookings in 1Q99 were down sequentially from 4Q98 levels of $63 million, the company gave guidance for bookings to increase over 10% sequentially in 2Q99-driven mainly by a resumption of limited spending by sub-contracting assembly houses seeking to upgrade technology. We believe that bookings in 2Q99 could approach $70 million. Table 2: Bookings Sequential Improvements 2Q99E 1Q99A 4Q98A Bookings* $70 mil $60.0 mil $63.0 mil Revenue $72 mil $61.2 mil $76.2 mil B:B 1.03 0.98 0.83 *Gross bookings for 1Q99 Source: Company Data, Prudential Securities Incorporated estimates. Some limited buying but not full fledge capacity additions yet. While customer utilization rates continued to improve to 75% (up from 65-70% in 4Q98) in the quarter, they are still well below the 85% threshold needed to spur broad-based capital investment. However, the stabilization of semiconductor demand at good levels combined with the resumption of IC unit growth has lifted the cloud of doom from KLIC's customer base. Incrementally, there appears to be more technology buys occurring than we had previously thought-in particular two North American semiconductor companies appear to be close to placing a round of technology buys, helping to underpin our assumptions of sequential bookings growth. Raising estimates due to better cost controls. As a result of better than expected cost control, as well as improving bookings environment, we are raising our estimates for FY99 and FY00 to reflect the following: (1)sequential growth in revenue of greater than 10% over the next several quarters, (2)better than expected gross margins as a function of overhead absorption, and (3)better than expected operating margins as the company has done an excellent job with cost controls. Table 3 and 4 show our new estimates versus our old estimates. Table 3: Estimate changes for FY99 and FY00 FY99 New FY99 Old FY00 New FY00 Old Revenue $318.2 mil $309.3 mil $494.0 mil $470.8 mil GM 32.7% 28.5% 36.4% 33.8% EPS ($0.37) ($1.00) $1.50 $1.20 Table 4: Estimate changes for FY99 Quarters 2Q99E 3Q99E 4Q99E EPS New ($0.25) $0.05 $0.20 EPS Old ($0.38) ($0.14) $0.08 Source: Company Reports, Prudential Securities Incorporated estimates. Product positioning and competitive landscape are both favorable. We believe that KLIC at least maintained its market share and most likely increased its penetration as the company has what we consider to be best of breed technology in the 8020 (which has still not lost an evaluation). In addition, the company is currently beta test the successor to the 8020, the 8028, which should begin to ship in volume late in the fiscal year. The 8028 will raise the bench mark once more vis-a-vis the competition, allowing for pad pitch spacing in the 60 to 65 mil range. In addition the 8028, should provide the company with the opportunity to increase product gross margins. Conclusion and Upgrade with Increased Price Target. While fundamentals did not improve dramatically in 1Q99, the tone of business is looking up and we feel that now is the time for investors to begin to accumulate a position in KLIC in anticipation of capacity buys in late summer 1999. We are upgrading KLIC to Accumulate from Hold based upon the following: (1) verification of an improving bookings environment as the industry resumes technology purchases more quickly than we had expected (2) strong cost controls by the management team (3) the expectation of a new product transition from the 8020 to the 8028 and higher margins (4)our ability to more confidently model a break-even quarter and (5) relatively attractive valuation. We have increased our price target to $32 from $18 which represents 19 times our Calendar 2000 estimate of $1.70 (revised up from $1.48). Prudential Securities Incorporated makes a primary over-the-counter market in the shares of Kulicke & Soffa. Prudential Securities Incorporated (or one of its affiliates) or its officers, directors, analysts, or employees may have positions in securities or commodities referred to herein and may, as principal or agent, buy and sell such securities or commodities.