BE Semiconductor Industries NV

AEX:BESI

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's '22 first quarter results.

You can log into the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Ms. Hetwig van Kerkhof, Senior Vice President, Finance. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company.

I would now like to turn the call over to Mr. Richard Blickman. Please go ahead, sir.

[Richard Blickman, executive]

Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release issued earlier today and then take your questions.

I would like to remind you that some of the comments made during this call and some of the answers by management in response to your questions may contain forward-looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM.

For today's call, we'd like to review the key highlights for the first quarter ending March 31 and also update you on the market, our strategy and outlook. First, some overall thoughts on the first quarter. Besi posted strong results in Q1 and with revenue of EUR 202.4 million and a net income of EUR 67.5 million, at the high end of guidance despite a challenging semiconductor equipment environment.

Revenue grew 17.9% versus the fourth quarter last year and 41.3% versus the first quarter '21. Given continued strength for our high-performance computing applications, including data centers, advanced logic and hybrid bonding and in automotive end user markets.

We exceeded anticipated quarterly shipment levels amidst supply chain disruptions through strategic inventory and production planning. Of note, shipments of hybrid bonding systems increased in the quarter as Besi overcame flood-related challenges in Q4 and met customer qualifications necessary to further ramp production.

Orders for Q1 this year were EUR 204.8 million, an increase of 1.1% versus the fourth quarter last year due to increased demand for high-end performance computing applications including follow-on orders for 2 customers for hybrid bonding systems. As compared to Q1 '21, orders decreased by 37.4%, primarily due to significantly lower bookings for high-end mobile applications post new model introductions launched in '21.

In addition, it reflected decreased demand from Chinese subcontractors for second half -- Chinese subcontractors for both smartphone and mainstream electronics applications continuing a trend which began in the second half of last year. We believe that current demand from Chinese customers is restrained given both current capacity levels and rolling COVID lockdowns, which have adversely affected production deliveries and new order development.

Besi's adjusted net income reached EUR 75.5 million in the first quarter, representing increases of 13.9% and 59.3%, respectively, versus the fourth quarter last year and the first quarter last year. Further, our adjusted net margin of 37.3% rose significantly versus the 33.1% achieved in the prior year period. Profit efficiency has remained at elevated levels over the past 4 quarters due to relatively stable gross margin and baseline OpEx development. This was achieved by increasing prices as necessary to offset inflationary input costs and successfully limiting overhead growth even despite significantly increased spending for wafer-level assembly activities.

The dividend of EUR 3.33 per share was approved at the AGM today. This dividend plus purchases through yesterday bring total distribution of EUR 287.6 million so far this year. Since 2011, we will have paid out almost EUR 1.2 billion to shareholders or 25% of cumulative revenue during this period. Given the strong projected cash flow generation and current market uncertainties, we intend to accelerate share repurchases from EUR 15 million to EUR 25 million per quarter under the current program.

Besi's liquidity position continues to expand with cash and deposits of EUR 696.6 million at the end of Q1 growing 3.6% versus year-end 2021 and 15% versus the fourth quarter of last year. Similarly, net cash of EUR 407 million increased by 9.9% versus the fourth quarter last year and 83 -- 88.3% versus the first quarter of last year due to strong cash flow generation and the conversion into equity of a portion of our 2023 and '24 convertible notes.

Post quarter end, we issued EUR 170 million of 1.875% convertible notes due 2029. The net proceeds from which we will be used to help fund the expansion of our wafer-level assembly portfolio, share buybacks and general corporate purposes, including acquisitions.

Next, I'd like to speak a little bit about the current market environment and our strategy. The semiconductor equipment industry has continued to grow during the first half of 2022, reinforced by strength carried forward from the second half of last year and CapEx announcements from the leading semi producers in the first quarter of this year.

From an assembly equipment perspective, TechInsights recently increased its 2021 growth rate to 71% versus the 55% initially forecast with growth continuing in '22 by 10.8%. The market grew to a record of $6.5 billion in '21 with growth expected to reach $7.2 billion in 2022, excluding any hybrid bonding revenue.

At present, the assembly equipment industry is faced with many cross currents and limited visibility. We see continued strength in the first half of '22 from advanced computing, automotive and hybrid bonding applications. In addition, growth is further supported by customer CapEx road maps and the anticipated construction of 47 new wafer fabs over the next 3 years. Many of such new fabs are for advanced packaging and wafer-level assembly applications.

In contrast, Besi's order development in '22 has been limited by a number of headwinds, including lower demand for high-end smartphones following the 2021 new model cycle, weakness in Chinese markets, global GDP uncertainties, disruptions to global supply chains and geopolitical conflict.

Our strategic priorities for 2022 focus on satisfying customer delivery schedules, navigating global supply chain and pandemic-related challenges and building out basis development, support and production capabilities to scale hybrid bonding and other wafer level assembly activities.

Towards this end, gross R&D spending increased 23% in the first quarter this year compared to the first quarter last year. Hybrid bonding process continues with shipments and orders increasing in Q1 and work continuing with AMAT to commercialize a classical solution. In addition, we named an [ SAP ] to run basis below 10-nanometer die attach to further our efforts in this area.

Now a few words about the guidance. For Q2 '22, we estimate that revenue will increase by 10%, plus/minus 5% versus the first quarter of this year, with gross margin levels staying in the range 59% to 61%. Operating expenses are anticipated to decrease by 0% to 5% as lower share-based compensation expense is partially offset by increased spending for development and service support activities.

At the midpoint of the guidance, we guide for the first half of '22 revenue of EUR 425 million and an operating profit of EUR 176 million, increases of 15% and 14%, respectively, versus the first half of '21. Longer term, we are encouraged by the favorable drivers for Besi's business as we advance further into the digital society, including the proliferation of artificial intelligence and industrial automation, cloud computing, 5G network expansion, data analytics, vehicle electrification and increased enterprise demand as employees begin returning back to office.

That prepares -- that ends my prepared remarks. I would now like to open the call for some questions. Operator?

[Operator]

[Operator Instructions] And the first question is coming from Mr. Robert Sanders, Deutsche Bank.

[Robert Sanders, analyst]

Yes. I guess the first one would just be on hybrid bonding. I think I remember you saying the backlog was relatively low last quarter in the sort of teens. I was just wondering if you could update there? And just get an update on how you're thinking about this ramp into the between now and the end of '23. I think in the past, you've talked about 100 units between now and the end of '23, sort of 50 TSMC and 50 Intels. It would be great to get an update on that.

[Richard Blickman, executive]

Well, great. The -- as we mentioned in the notes, we are shipping systems, I would say, every 2 weeks. And gradually, capacity is being expanded at a main customer in Taiwan and we are continuing to ship systems in the next 2 months also to other customers for process -- development process applications, also to institutes.

So the adoption of hybrid bonding is continuing in a way which can be characterized as very promising. Also, we are receiving customer visits again as we speak from Korea, who are also entering the hybrid bonding development as we speak.

Backlog, we have mentioned we received orders in total around the mid-20s. It has been increased with several systems somewhere in the low to mid-30s. But we're shipping those machines gradually to the customers. And the forecast till the end of '23 remains roughly in the ballpark figures, as indicated.

It all, of course, depends on the continued adoption rate of hybrid bonding and especially the development of chiplet road maps in various applications. But the bottom line is it is continuing, you could say, beyond expectation. So that's all very positive.

What I should also mention in Q1 has been a major achievement in shipping the first systems into production facilities and also having these systems ramp and producing everyday parts. Until Q4, we were operating in, you could say, a preproduction environment, which is completely different. So traction is building, and that is all very good news.

[Robert Sanders, analyst]

Great. And just as a follow-up, on the Chinese subcon lower demand and the reduced demand for high-end applications, mobile applications, is that across the iOS and Android area that you're seeing some weakness? And when do you think that could potentially come back? Is it this year or potentially into next year?

[Richard Blickman, executive]

Well, they're practically 2 separate subjects to be answered. Number one, on these high-end smartphones, there's always or so far, there's always been a cycle. And not every year, you have new models with significant, let's say, new features or functions. So last year was a very big year. This one is very normal, is less new features. Probably next year could very well be that we have some new features again related to 5G, backside cameras. There's a lot of public data which provides road map insight into high-end smartphones. And that's typically what drives our revenue in those applications.

Chinese subcontractors, well, we all had wished after February 18 was our fourth quarter and year-end. And then just after Chinese New Year, it was expected that due to various reasons that the next round of investments at those subcons would somewhere appear 2, 3 months later. It's now clear that we haven't seen that so far end of April.

It could very well be, and that is the expectation that, that next round should hit around end of June, July for shipments in the later part Q3 and Q4.

So that should mean if that materializes an uptick towards the second half of this year. That's as good as what we can see today.

[Operator]

And the next question is coming from Mr. Didier Scemama from Bank of America.

[Didier Scemama, analyst]

I just wanted to come back to your guidance for Q2, Richard. I just wondered to -- what is baked in your assumption for Q2? Is it true lockdowns impacting China OSATs? Or do you have a view as to when production could resume embedded in that? And I've got a follow-up.

[Richard Blickman, executive]

Typically, these COVID cycles are 2 weeks maybe 3 weeks. And so one would expect that at some point and some are opening, but because not all our opening, the logistics are very difficult. And that's the current status. So 13 major cities have lockdowns and more than half are related to our industry. So that's a major showstopper at this moment. But one expects that, that should open up in the next couple of -- sorry, next couple of weeks.

The key question is, of course, is this just COVID related? Or is there an overcapacity in the market? And that, we cannot answer today.

We look at our peers, our competitors, it's a similar picture. And underlying demand is still strong. There are still significant chip shortage. In many applications, we also faced the shortages in certain controllers, in certain other electronics in our systems. So far, we have been able to mitigate that and certainly for the second quarter, and that's why we also have this guidance.

But that tells you that the industry is still coping with, let's say, not sufficient capacity, so sufficient demand, but not sufficient capacity. And that would point towards once this COVID is under control in China that you should see a recovery anyway.

[Didier Scemama, analyst]

Okay. Very good. My follow-up is going back also to the order intake, which was as Rob alluded, it looks like your largest customer or indirect customer has not placed much order for the first quarter. So I was wondering if we could maybe just rewind again the tape a little bit. Is it a timing issue? It feels like it's not from your answer earlier. Is it more of a product cycle issue? Or do you think that there is any market share loss of your machines at that particular customer?

[Richard Blickman, executive]

Well, there's certainly not a market share loss. That's easy to answer.

The picture should also be a bit more explained. We had exceptional high order intake in Q4 on a relative basis. That was caused, and we explained that, I think, end of February because of preordering of certain critical components or modules and machines because of supply chain shortages. So if that would not be the case, the order intake in Q1 would have been significantly higher and in Q4, less.

So that has to be understood. So it's not that this has fallen off a cliff, so to speak. But again, as answer to previous question, there are cycles in these high-end smartphones and features -- high-end smartphone features. Not every year, you have the same amount of features. So that is typical after a very strong year, which was 2021, that you have a bit less in the subsequent year and in this case, '22.

[Didier Scemama, analyst]

Okay. And maybe last quick one. On the non-hybrid bonding part of your order book or your backlog, do you think that it would be feasible to see further declines in the second quarter, in the second half of your effectively non-hybrid bonding part of the backlog?

[Richard Blickman, executive]

Again, what I tried to explain, the key question is, will this next China subcontractor ramp materialize June, July this year with -- then causing an uptick in revenue in Q3 and Q4? That's the answer to your question.

[Operator]

And the next question is coming from Mr. Marc Hesselink, ING.

[Marc Hesselink, analyst]

Yes. My first question is actually also on the backlog. After we have very strong order intake in previous quarters, you still have a very elevated backlog. When do you expect that those orders can materialize? Is that -- are the lead times in that business still relatively low? Or do you get to a process where you can get closer to your original lead times?

[Richard Blickman, executive]

That's an excellent question. Because of supply chain issues, and I just try to mention that, but I will explain. Every single day, and we in the whole industry, are facing still major battles with supply chain components, particularly electronic components. And that makes, yes, let's say, the shortest lead times, which we were very well known for before COVID. It's still -- yes, let's say, less perfect than it used to be. So we have a bit longer lead time, but that doesn't matter because customers face this issue with all other equipment. So the setting up of new lines is impacted by a less, let's say, optimum delivery time of all equipment.

But still with that backlog, we have a decent visibility. We have a visibility for the whole of Q2. We have also already a significant part in Q3. We -- and I don't know if you noticed the inventory level is relatively high. And the simple reason is because to safeguard timely delivery, we have more parts on stock.

So on relative terms, our inventory level that current revenue should be around EUR 60 million, EUR 70 million. And today, it's EUR 100 million. So that tells you there are critical components simply to safeguard timely delivery.

When that will return to normal, who knows. But again, supply chain constraints persist. And they pop up in parts which you would not have expected. And that's a daily challenge, but we always find solutions.

[Marc Hesselink, analyst]

So in the guidance number for the second quarter, there is still an element of supply constraint there? It could have been more if that was not the case?

[Richard Blickman, executive]

Yes, yes, yes. And that's also why there's a range. Yes, clear. But again, the supply chain and also logistics in the world is still highly unpredictable.

[Marc Hesselink, analyst]

Okay. And my second question is on your cash position and the recent convertible, in the press release, you also have specifically mentioned the expansion of current capacity. Is that something that you want to have the flexibility that if hybrid bonding suddenly ramps up much quicker that you can also ramp up that capacity? Or is that just one small part of it? And should -- it is more like you want to have the general flexibility on all kinds of things?

[Richard Blickman, executive]

No. It's, let's say, 99% related to hybrid bonding chip to wafer development and capacity expansion required. So simply imagine for the next 5 years, that should become a major growth engine. And for that, you need not only cleanroom environment, you need labs. You need an infrastructure, support centers, what we explained in Taiwan in the U.S., which will become major game changers to the industry. And you need to be independently financed to organize that. And that is the main purpose of such a convertible.

At the same time, there could be opportunities in adding certain processes to our portfolio to expand the offering and in this, let's say, integrated solutions concept, i.e. cluster tools, you also need different processes. And that requires a financial backbone to be able in these, let's say, cyclical environment as this industry has been and will remain so. To develop that independently is the reason for issuing this new convert.

[Operator]

And the next question is coming from Mr. Charles Shi, Needham.

[Yu Shi, analyst]

Thank you Richard. I want to start the first question around mobile. Obviously, the Android side of the weakness on the -- for the smartphone is well publicized. But the high-end mobile, which you talked about, sounds like you're expecting less features this year. Obviously, I understand you don't exactly know what your end customer is going to put on the menu for this year's high-end mobile launch, but it does sound to me that some of the features you were expecting maybe a quarter ago may get pushed out to next year's version. Is that the case? Because when I think about how your business kind of correlates with the number of features in the high-end smartphone space, could that set up '23 to be a much better year than '22? Or am I thinking; the right way?

[Richard Blickman, executive]

You're thinking the right way. So -- and what I mentioned earlier, there's a lot of information in the public domain about these road maps. And it points towards a next round in '23.

On the other hand, if you compare to the previous cycle, 2017, which then got overexcited in '18, which caused a significant cancellation in June time frame of '18, and it took all of '19 to come back to next models in '20. So it could be 1 year, but it could also be 2 years. Who knows?

But the key question is, is Besi involved in all those new developments? And the answer is yes. So what's on the menu? As you said, it's hard to forecast, Charles, but we are definitely ready for any next round.

[Yu Shi, analyst]

So maybe the second question is around China subcon. I think if I hear you correctly, you think there is a chance for the demand to come back maybe around end of Q2 or second half of this year? So my question is, is that the kind of indication your customers have given to you? Or how much you feel like you can trust those kind of indications?

[Richard Blickman, executive]

Well, that's an excellent question, of course. Number one, it is customer-driven. Number two, when there are no orders placed for more than 6 months, there are no volume orders and of course, there are some orders for new applications. So it's not a complete freeze. But volume ramp, it's very reasonable to assume that, that should recover in the next, let's say, 3 months, maybe 6 months, but then you have had a year of digestion because it started, let's say, September last year, the slowdown. And it should pick up at some point, unless we have a major disruption in the industry as a whole or in the world, for that matter.

But number one, it is customer -- simply customer programs identified. And we have to prepare for that. If you want to deliver that in -- and these are typical machines, which are turned around in 6 to 10 weeks max. With long-lead items, you have to prepare yourself to get the major part of the next round.

[Yu Shi, analyst]

Got it. Got it. Maybe my last question. Your -- one of your peers, this is the one based in Hong Kong, Singapore, that's the one I'm talking about. They [indiscernible].

[Richard Blickman, executive]

Sorry...

[Yu Shi, analyst]

Sorry, can you hear me, Richard?

[Richard Blickman, executive]

Yes. Sorry, I interrupted you.

[Yu Shi, analyst]

Yes. I mean, your peer seems to be preparing to shift to a customer, a hybrid bonding system, they're talking about end of this year. Any sort of idea whether this is -- this competitor is coming in because of their push or the customer pool over there?

[Richard Blickman, executive]

Well, it's hard. Let's say, I think -- but everyone, if you can build a bonder, which can place within an accuracy below 500 nanometers, you want to be part of this next technology universe. So competitors are pushing whatever capabilities into this market. By surprise, the whole hybrid chiplet world, the adoption rate has accelerated, which is confirmed not only in Taiwan, U.S., but now also in Korea.

We have, as I explained earlier, we've had a very important quarter, first quarter to really get our machines in full production environment, operating 24/7. And we now build those machines. And in a couple of days, they are qualified below 150 nanometers. Who would ever have expected that?

So we are making major progress. We're working on a second-generation which should be able to produce at 100 nanometers early next year, and that is coinciding with the 5 nanometer chip design, architecture, and that's well on track. So there's more than just one bonder.

[Operator]

And the last question is coming from Mr. Ruben Devos, KBC Securities.

[Ruben Devos, analyst]

I just had one question related to hybrid bonding. Just to continue on that. I mean, we understood that you already grew the workforce and built a cleanroom expanded service support. And I believe in earlier calls, you mentioned you objective is to produce 12 to 15 hybrid bonders per month. Just looking at where you are today from an operational standpoint? Or is sort of the capacity already and what may be, let's say, the speed in ramping up. And then yes, given at the moment you're seeing out there, is there a possible upside to that production target in your view?

[Richard Blickman, executive]

Well, in clear terms, 15 machines per month, maybe 17 depends a bit on the configuration times, 12 does satisfy an optimistic adoption rate scenario for the next 3 years. We can increase that capacity in 6 to 9 months simply by expanding the cleanroom in the current facility. We have concluded on the next site in Malaysia for further expansion for our other products so that we can use our main facility to expand in the future, hybrid bonding, manufacturing, testing. But step by step, don't get overexcited.

200 systems per year is already a major achievement in the next 3 years and Besi is able to cover that demand.

[Ruben Devos, analyst]

All right. All right. Very clear. And just a second one on the end markets, basically. I mean you talked extensively about mobile. But you also mentioned strength in high-performance computing and in automotive. I understand that in combination, they were about, let's say, 32% of your revenue in 2021. So how would you compare their strengths relative to maybe the interim weakness in mobile?

[Richard Blickman, executive]

Well, if you look over time, automotive revenue has been between 15% and 20% over a long period of time. With one exception, and that was 2020, when it dropped down below that level. Then the high-end computing or let's say, the data center devices, but also for laptops and computers, that's usually 20% to 25% of revenue and high-end smartphones is, last year, was even around 40% of revenue. So that's the largest volume from our revenue.

So that has been building, by the way, over the years, over the past decade, you can say from high 20s to low 40s is simply because we increased our market share in that area significantly.

It's difficult to imagine an offset by automotive or in the computer space, hybrid bonding is still early days, but there's a slide in our pack where you can see that on average, the growth in those areas should be significantly higher than that for the overall market.

That does not dampen cycles, just a little bit. But it certainly also does not offset the cyclical behavior of this market.

But the key is does Besi has the right customers? Does Besi have the right products? #1 choice, #1 in market share, and that's where we have to look for. And from a cost point of view, do we have the best margins?

[Operator]

And there is a last follow-up question from Mr. Stephane Houri, ODDO.

[Stephane Houri, analyst]

Just wanted to know if you can help us model the OpEx dynamic going forward because in Q2 guidance, they were a bit higher than the market expectations. So if you can help us understand really the dynamic there.

[Richard Blickman, executive]

Yes. The key to understand is that R&D spending is a bit higher. And the reason is also very simple. If you look at IFRS, you capitalize the cost until you have market acceptance and what happens with hybrid bonding, and we can be very happy that due to acceptance in the fourth quarter into mainstream applications, we now start to amortize. And at the same time, continue the development cost. So there are several effects which increased the R&D spending.

But then simply imagine that in the position we are right now, which is a very successful position if we can qualify it in that way, we are doing whatever we can to maintain that position, expand it also with the other major customers entering into the hybrid bonding, applications, chiplets.

And we mentioned several times that R&D spending in that world is simply higher than in the [ NT1 ] world, as we call it. So that will continue to impact our R&D spending as part of the OpEx.

Hopefully offset by higher margin potential and that's also already visible. So that's all good news.

[Operator]

There are no further questions. Please continue.

[Richard Blickman, executive]

Well, thank you all very much for listening in. Any further questions, don't hesitate to contact us. Thank you. All the best. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes the Besi event call. You may now disconnect your lines. Thank you.