Soitec SA

PAR:SOI

Earnings Call Transcript 2021-Q2

[Operator]

Hello, and welcome to the FY '21 Q2 Sales Conference Call. My name is Judy, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] I will now hand you over to your host, Paul Boudre, to begin today's conference. Thank you.

[Paul Boudre, CEO & Director]

Thank you, operator, and welcome to Soitec conference call dedicated to the publication of the second quarter sales of our fiscal year 2021. This is the quarter covering the period from the 1st of July and to the end of September 2020. I am Paul Boudre, Soitec CEO. Together with me on this call are Léa Alzingre, our CFO; and Steve Babureck, our Investor Relations Officer. So before going into the details of our Q2 performance, let me say a few words about our end markets. Regarding smartphones, which, as you know, is our #1 end market. We continue to anticipate around 10% shipment decline for global smartphone 2020, followed by a 12% rebound in calendar year '21. Bear in mind that 5G penetration is rising fast. We continue to anticipate around 200 million 5G smartphone shipments in 2020 and around 450 million units in 2021, and this is in our current model. This is an important criteria for us since 5G smartphones contain an average 60% more contained than 4G smartphones. And we are working on new teardowns to get an even better understanding on the opportunity. So the weak macro environment has also negatively impacted the automotive and the consumer electronics end markets in 2020. But most market expected to rebound significantly in 2021 on the back of a macro recovery. So now moving on with the review of our Q2 sales figures. As you can see, we enjoyed a solid performance. As anticipated, we achieved a good rebound in revenues in Q2. In July, we told you that we would bottom in Q1 and that we expected Q1 to be the lowest quarter of our fiscal year '21. Indeed, our sales increased EUR 140 million in Q1 to EUR 141 million in Q2. This represents a 27% sequential growth at constant exchange rates. In Q2, we achieved a plus 3.5% organic growth compared to Q2 '20. Overall, our H1 sales are almost flat on a like-for-like basis compared to H1 '20. On a reported basis, the performance is slightly lower as we have been facing a small negative currency impact since the beginning of the year. Based on the level of revenue achieved in H1 as well as on our expected performance in H2, we confirm the flat revenue guidance that we gave for the full year. H2 will be a tougher comparison basis than H1, but we are confident that we will benefit from a strong seasonal boost. We therefore confirm that our revenue will continue to increase sequentially in the second half of the year. If we now dive deeper in our Q2 performance and look at sales by category of products. Q2 year-on-year sales growth reflect a mixed performance. The RF growth remained strong and continues to be boosted by 4G and 5G. We enjoyed a positive increase in our RF-SOI products with growth being supported by 200-millimeter wafers, as this was already the case in Q1. In addition, sales of POI wafers for RF filters are growing as expected and should continue to increase quarter after quarter. Imager-SOI and Photonics-SOI also recorded a robust performance. On the other hand, both Power-SOI and FD-SOI were negatively impacted by the economic environment. By revenue type, starting with 100- and 200-millimeter. So Q2 sales reached EUR 71 million. This is an 8% sequential increase at constant exchange rate compared to Q1. Compared to Q2 last year, 150- and 200-millimeter sales growth reached plus 17%, excluding currency effects. We had a slight positive volume effects but most of the growth came from a more favorable product mix, essentially more RF-SOI and less Power-SOI. The sharp growth in RF-SOI 200-millimeter continues to be driven by the increase in RF-SOI content in every new smartphone 4G and even more in 5G. Like in Q1, lower sales of Power-SOI is due to the decline of the automotive market in the context of the COVID crisis. In addition, we benefited from the continuous ramp-up in the productions of POI wafers for RF filters at our Bernin 3 facility. As you know, the demand for our new POI product is driven by the higher number of filters and the enhanced performance needed for 5G and 5G smartphones, which have to cope with an increased number of frequency bands. If we now look at our 300-millimeter businesses. Q2 300-millimeter sales reached EUR 64 million is -- represents a strong 59% sequential increase at constant exchange rate compared to Q1. We had a strong Q2 last year, so compared to Q2 '20, 300-millimeter in sales declined by 9%, excluding the currency effect. Sales of RF-SOI 300-millimeter remain at a very high level. On the other hand, sales of FD-SOI were significantly lower than in Q2 last year. However, I mean, if I look at FD-SOI design and tape-out activities of chips built on FD-SOI, wafers continue to be extremely strong. In addition, sales of Imager-SOI for 3D sensing applications and Photonics-SOI for data centers have been pretty robust in Q2. So let me finish by a quick word on royalties and other revenues. Sales in this segment went up from EUR 5.6 million in Q2 '20 to EUR 5.8 million in Q2 '21. This represents 6% increase at constant exchange rate and perimeter. So let me now give you just a quick update on the main events, which took place during the quarter. So we successfully issued last month 5 years EUR 225 million convertible bond. We are very pleased with the success of this offering. Bonds were issued at very favorable terms, bearing no interest and at a premium of 45% on our share price. This shows the investor confidence in our business model and in our prospects. The net proceeds will be used to provide us with greater flexibility, giving us the opportunity to finance potential growth opportunity.And to complete the review for the quarter. In July, the SOI consortium held a conference dedicated to Silicon Photonics, which was organized in collaboration with Semicon West. This is an important event for Soitec to present how and when state-of-the-art Silicon Photonics will replace chip-to-chip interconnect in VLSI. We are also very honored to have received some awards that are recognizing our industrial excellence. Soitec was rewarded with the prize for digital accelerations in the category Impact for Good by French business channel, BFM business. And we received the Factory of the Year trophy by the leading French industry trade magazine, l’Usine Nouvelle. This prize recognized the industrial excellence of Bernin site, where Soitec relies on digital technology to optimize its industrial performance. Last but not least, I remind you to the strategic partnership with Qualcomm. We signed this partnership in July, and this is regarding POI products. So to conclude these opening remarks. I would like to reconfirm our outlook for the fiscal year '21.We confirm expecting our fiscal year '21 sales to remain stable at constant exchange rates and perimeter. As I said earlier, we see the level of our sales to continue increasing in the second part of the year. And we also continue to expect our EBITDA margin to reach 30% in fiscal year '21. So this ends our opening remarks, and we are now ready to take your questions. Operator, please? Thank you.

[Operator]

[Operator Instructions] The first question is coming from the line of Emmanuel Matot from ODDO.

[Emmanuel Matot, Analyst]

Paul, it seems that the ramp-up of 5G smartphones is stronger than expected. You don't change your expectation for 5G smartphone volumes. That's my understanding. But do you agree to say that they look conservative now, giving you more confidence about reaching your targets for fiscal years 2021 and 2022?My second question is about FD-SOI. When do you think FD-SOI will return to growth? And where are you in your project to establish a friendly FD-SOI ecosystem in China? And my last question is about your EBITDA sensitivities to the euro-dollar parities. Can you update us on that point? And do you have any hedging in place for this year?

[Paul Boudre, CEO & Director]

Thank you, Emmanuel. So I will let Léa answer the last questions. But if I start with the first questions that you have. Basically, I mean, I understand the logic of these questions, and this is regarding obviously the trend in the 5G. And I am sure it will come back a lot in the next couple of months. Short answer is, it is too soon for us to raise our guidance. As you all remember, we had a very strong fiscal Q4 for fiscal year '20. March quarter was very strong, and it was obviously driven by RF. So yes, you can consider that we probably stay on the safe side, but we are also working on, as I said, on new teardown to really understand the complete pictures before to evaluate our fiscal year '22. On the FD-SOI in China. Clearly, what we see today the -- is -- in China, sorry, first of all, on the FD-SOI, we see tractions of design wins and it is -- this is very strong. You probably heard from GLOBALFOUNDRIES in its latest show. So basically, we know that this is clearly touching the applications that we are targeting. And by that, obviously, IoT and the next generations of IoT being more intelligence going into edge. We think about ear buds. We talk about transceiver. We -- and obviously, the automotive MCU is also part of it. So we are very confident to see again FD-SOI to be back on the train for growth within the next few quarter and also in fiscal year '22, okay? Second part would be a very interesting, second part of our fiscal year '22. So on China, I can only say that discussions are progressing. I mean it's clearly -- the objective is to build a domestic supply chain. And FD-SOI is part of it. It is one of the critical technology for the future and by critical, I mean important. And so many key applications in China will be based on FD-SOI. So making progress, the overall environment is not really helping. So before the elections, I don't even believe that anything could have been achieved. We'll see by the end of our fiscal year where we can land. And finally, I mean, on the EBITDA. I mean I think that you have the questions on fiscal year '21 and maybe fiscal year -- on fiscal year '21. So maybe, Léa, do you want to comment on fiscal year '21?

[Léa Alzingre, Senior Director & Acting CFO]

Yes. So your question is about the EBITDA sensitivity to FX exposure. So yes, we can confirm that most of the FY '21 exposure is [ ageless ]. So that's why our guidance regarding EBITDA is without any reference to FX rates. And regarding FY '22, we will give more details next month during H1 results.

[Operator]

The next question is coming from the line of Varun Rajwanshi from JPMorgan.

[Varun Rajwanshi, Analyst]

Paul, I'm trying to -- I'm going to ask this question in a different way. I mean the recent phone launch event by a major North American customer, they're essentially rolling out all of their smartphone models in the U.S., which are based on -- which have millimeter wave capability. Now that's clearly a positive surprise and the expectation is that more smartphone OEMs will launch millimeter wave-enabled smartphones for that particular region. So clearly, the millimeter wave smartphone traction is better than expected. How does that flow through to Soitec? I mean millimeter wave smartphones have higher product content. So I just wanted to get your comment on that. And how does that relate to your sales performance in FY '21 and '22? You've laid out your 5G smartphone assumptions of 200 million units in FY '21 and 450 million in FY '22. Within that both is your millimeter wave assumption, if you can share that. And secondly, can you also update us on the progress of your Singapore fab ramp? And also, if you can comment on if there are any new customers beyond Qualcomm that you're working with on POI. So any update on commercial activities on POI beyond Qualcomm.

[Paul Boudre, CEO & Director]

So yes, thanks for the question. So the first one is on 5G. Yes, the good news as you said is that if you look at all the main -- out of all the main now smartphone suppliers have switched to 5G. I mean they are proposing 5G everywhere. The good news also is that the speed of adoption of the smartphones. I mean, we have seen in China an incredible speed adoptions on 5G smartphones. Pricing also is very attractive for these smartphones all over the world. So I think that what we can expect in the future is a much faster adoptions overall on 5G, as we could have maybe expected some quarters ago. Now when it comes to 5G millimeter wave, you said it right. I mean there is more content in the smartphones with 5G millimeter waves because we have both. I mean we have not only the design of the sub-6 gigahertz inside them, but also we have to add the millimeter wave. As we told you at the beginning of the year, we have our modeling capability but now we are [ real point ]. So we are in the middle of these teardowns and to understand, I mean, what is the size of the opportunity as we continue to really look at it. But for now, I mean, we decided not to revise our guidance because it is too soon. We have to work on all these models and understand basically the dynamic of next year. On POI, I mean, on POI, yes, we have other prospect. And yes, it is a lot of opportunity for us. So we have obviously a strong value proposition for this product, as you can measure by the adoptions of Qualcomm products. This is clearly an outstanding demonstrations of the value that we can bring with new materials. And many customers right now under evaluations and slash qualifications, I would say. As you can imagine, our Bernin 3 facility is very, very, very busy. And this is very good. You had another question, and this is about Singapore. Singapore is ready for the ramp. Clearly, we are finalizing right now the latest qualifications, product qualifications on -- with customers around the world. Clearly, the growth will come from Singapore the next fiscal year, and we are prepared to not only start ramping potentially early next calendar year and basically ramp this factory next year. We will tell you more about this as we continue to exchange with you.

[Operator]

And the next question is coming from the line of Aleksander Peterc from Societe General.

[Aleksander Peterc, Equity Analyst]

Just on -- very briefly on Bernin 3. Can you share any numbers at this stage on the ramp there? Or is it still too early to comment on this? Then secondly, just on the sequencing of quarters for the remainder of the year. So we had Q1, which is a bit down, Q2 a bit up. That means H1 was flat. You guide still flat for the full year. So when you look at third and fourth quarter, which one of these are going to be weaker or stronger than last year? Just so that we can kind of anticipate how the rest of the year shapes out in broad terms. And then final one. If you could update us on your progress in silicon carbide, if everything is on schedule there and if you have anything new to tell us on that.

[Paul Boudre, CEO & Director]

Yes. So on the Bernin 3 ramp, it's -- clearly, we are ramping -- we are maxed out based on our capacity. As we add tools and qualify tools, we are using all the installed capacity. So it is going to be already significant this year, but it's going to continue again next year. As you know, we have a max capacity of 500,000 now wafer out. And we basically have not set a time line to fill this capacity in an exact way, but I can tell you that at the speed of -- that we see in terms of the demand is very, very encouraging. The other question was...

[Aleksander Peterc, Equity Analyst]

About quarterly sequencing.

[Paul Boudre, CEO & Director]

Quarterly revenue, sorry, yes. You know that we are not guiding quarter by quarter. But clearly, yes, you are right. I mean our H2 last year was enormous and driven by a fantastic Q4. So we continue to see exactly, I mean, the same scenario in H1 and H2. So our H2 is going to be, I mean, much higher than, as you can see, compare -- I mean, comparing quarter-to-quarter, it's still a bumpy road. But we are very, very solid on the fundamental of our growth for the next part of this year. On silicon carbide. Yes, I mean, the good news is, and this is an important news, that the pilot line that we have now is fully operational, and this is a critical step. So we lost, obviously, a couple of months there because of COVID-19 situations. But clearly, you understand also that we have been traveling wafers with our suppliers during this period. So the good news is that we have started to ship some samples to some customers in order to not qualify but verify that everything that we were talking about was physically in line with our expectations and our customers' expectations. We have samples that will be out of the pilot line in Q1 calendar year next year, so part of our fiscal year Q4. And this is also a very important milestones because we expect that not only the quality of these wafers but should show a big improvement. But clearly, also, we will embark some new improvement that we have done in the device itself, in the product itself. So we are very positive about silicon carbide value and our value propositions. And clearly, the market traction is there because when you look at the automotive and the trend of the new innovations in automotive that is accelerating, it's really also taking care of silicon carbide demand. So the focus for us is really to create the product and to get alignment with our partners in building this new product, this new engineered product. As you know, we are designing a new silicon carbide wafer. So it will be very important to get during the course of next year a lot of technical feedback, and we will share with you.

[Operator]

And the next question is coming from the line of Jerome Ramel from Exane BNP Paribas.

[Jerome Ramel, Analyst of IT hardware and Semiconductor]

Paul, two questions. The first is on the backlog of Global Foundry (sic) [ GLOBALFOUNDRIES ]. Indeed, more than double compared to the last time that you updated us into 2018, from EUR 2 billion to EUR 4.5 billion. Do you also see good traction with your other foundry, namely Samsung? So that's the first question. Second question, what is your capacity utilization rate right now? And the underlying question is, are we seeing some adjustments within the supply chain in terms of inventories because of the Huawei situation or your capacity utilization rate is tracking the end demand right now?

[Paul Boudre, CEO & Director]

Yes. So on FD-SOI and what GLOBALFOUNDRIES is saying. I mean, we are extremely close to this. But clearly, the -- as I said during the call, many strong applications coming into the tape-out phase, not only for edge AI or for AI or for IoT, but we are also confident to potentially be able to penetrate 5G millimeter wave in future generations of product. So that's very, very important. When you look at FD-SOI as a whole, I mean, you know that FD-SOI globally, I mean, the ecosystem has yielded meaningfully over the last few months. We have seen VeriSilicon IPO, which is the largest -- one of the largest IP provider on FD-SOI, very successful IPO. We know that the domestic Loongson quad-core in China, 1.5 gigahertz CPU using 28-nanometer, the SOI has been also very, very strong in getting into the market. Again, that is -- their new product has been elected product of the year on FD-SOI by EIA. So -- and finally, I would say that ARM will release its Musca-S1 MRAM enabled IoT demonstrator for ecosystem partners. So as we continue to grow the -- not only the ecosystem, clearly, the platform at GLOBALFOUNDRIES but also at Samsung is getting stronger. So one, on Samsung, there is the trend of a lot of activities around 28-, but also 18-nanometer. And we can't comment any details, but yes, market traction is strong with both key foundries, key applications, again, as I said, 5G, AGI, automotive and radar and MCU. Regarding the trend here, with the way the situations and the capacity that -- and the capacity. So on capacity, first, I will say that our 300-millimeter [ balance ] is full. And clearly, we are ramping now in -- we'll start ramping in [ phases ] on both RF-SOI and FD-SOI. With RF-SOI, we continue qualifications, product qualifications in order to be ready by the beginning of next year. And in 200-millimeter Bernin I, we are still growing high rate. And we believe that the coming quarters are going to be very interesting in terms of filling the gap. And I know you had a question on Huawei. But clearly, the Huawei, I mean, or the trade war impact, I will say, first of all, the one thing that I would like to say is that we have been respecting all international regulations. There has been no impact really on -- or marginal impact on our business. As you know, our leading product became standard in the industry. So with market share changes, the smartphone ecosystem, it is kind of a zero-sum game for us and demand that's been really intact for our products.

[Operator]

[Operator Instructions] The next question is coming from the line of Stefan Chang from Aletheia.

[Stefan Chang, Research Analyst]

And Paul, congratulations for your results and also from your guidance. So I have 2 questions here. The first question is still regarding millimeter wave. So this is actually a follow-up to an earlier question. So I'm just wondering, based on the current millimeter wave penetration rate versus the whole 5G, do you see it is higher than your earlier view? Or this is pretty much in line with your earlier expectation? And how this will alter, I think in the opening remarks, you mentioned about 5G carry 60% higher content value versus 4G. And how the millimeter wave penetration rate will alter this number in your observation now? After this, I have another follow-up.

[Paul Boudre, CEO & Director]

So thank you. I mean, this is clearly an important question. And as I said in my previous remark, I mean, we are working on new teardowns to get an even better understanding about what 5G brings in terms of opportunity, okay? So we are trying now to confront reality and the 60% versus what is existing today on the smartphones. So I'll come back to that maybe in several months. But this is an important questions, and we could have to readjust our model. And you have another question for me?

[Stefan Chang, Research Analyst]

Yes. And another question is two days ago, Texas Instruments actually they indicate they see a rebound in the automotive demand. But in your release, we didn't really see that. I'm just wondering, do you also see a rebound regarding the automotive demand? Is that in your expectation? Or the rebound is actually better or actually -- or you didn't see similar?

[Paul Boudre, CEO & Director]

Yes. So as I said during the last call, I said that we were planning for the automotive rebound potentially, I mean, in fiscal year '22. Clearly, for us, it has bottomed out, and all the basically signals that we are getting confirmed that this is correct. I mean automotive is back on track. So we had to clean some inventories during the course of this fiscal year, and we are probably cleaning this inventory faster than we could have expected at the beginning of the year. So we see a stronger H2 versus our H1 in basically the automotive segment.

[Operator]

And the next question is coming from the line of Robert Sanders from Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Just to have a specific question on FD-SOI. Have you seen any interest in FD-SOI for use for Wi-Fi 6? And related to that, on the MCU side, have you seen any of the kind of large general purpose microcontroller companies like ST, et cetera, being prepared to consider FD today? I mean, obviously, I think in almost all of them are using bulk today. So it would be great just on the specific 2 application areas. And I have a follow-up.

[Paul Boudre, CEO & Director]

Yes. As part of the basically FD-SOI road map, we are clearly getting into a lot of co-development right now at the wafer level and the substrate level to really get into more applications and more opportunities, not only around 5G, but also around the WiFi 6 and maybe future architecture.So it is clearly an ongoing activity. I don't know if the wafer will be FD-type life or -- but it's clearly a major attraction that we see right now in terms of design capability for -- at the substrate level again to continue to evolve our product and create new generations of product. On the MCU, yes, traction is there. I mean, clearly, there is nothing I can share really today. I cannot share any details. But clearly, the MCU road maps on both the FD-SOI as part of the applications.

[Robert Duncan Cobban Sanders, Director]

Great. And just on Singapore. Sort of you say it's ramping early next year. So I assume that, that means that it's been relatively slow until now. I'm just sort of understanding, as you ramp that steeply early next year, so I'm guessing you're around 150k right now. As you ramp that up to 400, when does the sort of margin headwind dissipate? When do you -- because I think you saw a 300 bps headwind last year. So does that -- when do you start to get to kind of neutral levels? At what level of capacity do you start to not really see any particular headwind from that ramp?

[Paul Boudre, CEO & Director]

Yes. It's too early today to speak on margins but operating leverage is obviously there. So remember that when you think about Singapore, that we have done something very smart, I believe, and it's going to be off sooner than later. And what we have done, I mean, we have not one activity here but we have several activities. And these activities, refresh activities, we have continued to ramp our refresh activity, insourcing our refresh activity in Singapore across this year and last year, and we will continue to do so to the optimum level. We have also insourced the AP for 300-millimeter RF wafers. And we have continued this year to ramp capacity in AP. And we have qualified and adjusted our capacity, not only for FD-SOI, but for RF-SOI. So as we -- as you think about this site and how do we observe fixed cost on this side, I think that we have created a platform here that will benefit from what is coming in the next years to come.

[Operator]

And there are no further questions in the queue. [Operator Instructions] The next question is coming from the line of Tony Lebon from ODDO.

[Tony Lebon, Fixed Income Analyst]

Just getting back on the issue of -- the issuance of your second convertible bond. You -- just in terms of financial -- in terms of financing policy, we -- I think we've heard before, a couple of quarters ago, that the big chunk of the CapEx within the company will probably be sales financed with -- I mean gradually with the cash flows generation. Could you please give more color on the, let's say, the background, the rationale of the second CB issue. You earlier said that you were very happy with the issuance condition and that it gives, let's say, some flexibility and makes sense in the current context. But if you could give a little bit more of color on the, let's say, the background in terms of financing.

[Paul Boudre, CEO & Director]

Okay. So thanks for the questions. Yes, clearly, yes, if you look at our 5-year business plan, what we have said and we continue to say that we have the ability to self-finance this business plan. And nevertheless, we -- as you understand, we have potential additional growth opportunities, and we want to be ready not to slow down these opportunities. But clearly, to be on track with the market demand and accelerate some of these opportunity if it's needed and if it's required. So we put ourselves, I would say, the situations that we are safe in terms of the current BP, but we are also very, very strong and capable to, financially speaking, to accelerate at the customer demand. And it gives our customer a very, very good feel also on the commitment we have short term, long term to sustain the road map.

[Tony Lebon, Fixed Income Analyst]

Just a quick follow-up. If you grasp this growth -- this very interesting growth opportunities, could this have an impact on the, let's say, the ramp-up in terms of free cash flow in the next few years? Or not much change at all?

[Paul Boudre, CEO & Director]

Yes. Too soon to give this level of details in this call, but clearly, this is a very good question, and we will share the details in the coming discussions we will have with you, sharing the financials and the way we are managing this as part of the growth. Yes.

[Operator]

And there are no further questions in the queue. [Operator Instructions]

[Paul Boudre, CEO & Director]

So thank you for your questions. I mean, just I wanted to add that the next date in our agenda will be the publications of our interim results on the November 18 after market close, which will be followed by a webcast presentation on the next morning. So this end our call for today. Thank you for your attention and stay safe, right, and see you soon. And I'm looking forward to talking to you soon. Bye-bye.

[Operator]

Thank you, everyone, for joining us on today's call. You may now disconnect your handsets. Hosts, please stay connected.