Soitec SA

PAR:SOI

Earnings Call Transcript 2020-Q4

[Operator]

Hello, and welcome to the Soitec Q4 sales conference. My name is Caris, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions]I'll now hand you over to your host, Paul Boudre, CEO, 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 fourth quarter sales of our fiscal year 2020. So this is the quarter covering the period from the 1st of January to the end of March 2020. I am Paul Boudre, Soitec's CEO. Together with me on this call are Sébastien Rouge, Soitec's CFO; and Steve Babureck, Soitec's Investor Relations Officer. As usual, we will briefly comment on our sales performance. And after that, we will open the floor to questions. So before discussing the business and financial items, let me say a few words about our daily management of the COVID-19 crisis. From the beginning of this pandemic, our priority has been to focus on our employee's safety. And I'm very pleased that in doing so, we have been able to ensure business continuity. I am particularly grateful to Soitec employees. They are doing a great job in these conditions.For all staff who didn't need there to be physically at our premises, we implemented work from home. We have been able to maintain a high level of service for our clients. In the meantime, we have been able to ensure continuity of productions at our old industrial facilities. And we also maintain all key R&D programs to secure the road maps. The only drawback so far has been the shipping conditions, but we found ways to deliver our clients, even sometimes with some delays.I am also very thankful for all solidarity initiatives that our teams have continuously taken to help the communities around us. I will not go through these initiatives on this call, but I'm very, very proud about what we do.So let's start with an overall review of our Q4 sales figures. We achieved a very strong 40% organic growth in Q4 '20. This is allowing us to reach more than 28% full year '20 organic growth, which is close to our guidance of around 30%. With COVID-19, we have been slightly impacted by the difficult shipping conditions towards the end of the quarter. Going back to our Q4 performance, we reached EUR 204 million in revenues. This represents an all-time quarterly sales record for Soitec. Growth was mainly driven by the continued success of our RF products. Indeed, we continue to benefit from increasing content of RF-SOI, driven by the deployment of both 4G and 5G. Q4 growth is essentially reflecting higher volumes. Higher volumes came from the highest ever recorded level of productions achieved over a quarter at our industrial facilities, and which shows the solidity of our operating model. Our own output was also supplemented by the output of our Chinese partner namely Simgui. On a reported basis, we achieved 45% growth in Q4 2020 compared to Q4 '19. This reflects, as I said, a 40% organic growth, but also a positive currency impact of close to 5% and a minor scope effect related to the integration of EpiGaN. So let's now move to our sales performance by revenue type, starting with 150/200 millimeter. Compared to Q4 last year, 150/200 millimeter sales went up by 47% excluding currency effects and reached EUR 92 million. As explained, this is essentially the result of much higher volumes.By type of products, we had a combination of further sharp growth in RF-SOI 200 millimeter and stable sales of RF-SOI. Although this is still marginal at this stage, we also benefited from the ramp-up of the production of disruptive 150-millimeter POI wafers for smartphone, RF-SOI with filters at our Bernin 3 facilities. Demand for the new POI products is driven by the higher number of filters and the enhanced performance needed for smartphones in order to cope with the increased number of frequency bands used by 4G and 5G.If we now look at our 300 millimeter business. Compared to Q4 last year, 300-millimeter sales have increased by 39% excluding currency effects and reached EUR 104 million. We saw much higher volumes and an improved product mix, which were both related to a sharp increase in RF-SOI 300 millimeter sales. We see continuous tractions coming from 4G and now for 5G. Demand is building up for both network infrastructure and smartphone, so more RF-SOI content is required to fulfill the need for more switches, more antenna tuners and more low-noise amplifier.So we also enjoyed some relatively good performance in other 300-millimeter products. Even if sales of FD-SOI were lower than the very strong level achieved in Q4 last year, the adoptions of FD-SOI is making further progress. We continue to expect tractions related to the deployment of IoT, AI and 5G. All these applications across a large -- across of a large range of consumer goods and connected devices.So we also had a good revenue performance in Imager-SOI remains the right engineered substrate solutions for some 3D sensing applications for smartphones. Sales of Photonics-SOI were also higher than in Q4 last year. Photonics-SOI allows higher speed of data transmissions and increased bandwidth optical transmissions that are required for the new generations of data center. So let's now move to Royalties and other revenues. This segment has grown from EUR 7.8 million in Q4 '19 to EUR 8.3 million in Q4 '20. This represents a 1% decline at constant exchange rates and perimeter. So on the one hand, we had a decrease in Royalties and IP revenues down from EUR 2 million to EUR 1 million. On the other hand, we had further growth coming from Dolphin design. Dolphin's revenue were up 23% compared to Q4 '19. And Dolphin Design is one of the leading IP provider of power management solutions for IoT, automotive, smartphones' semiconductor chips. And finally, we also benefit from the scope effect related to the integrations of EpiGaN.Over the full year, we reached sales of EUR 598 million, up 28.3% at constant exchange rate and perimeter versus fiscal year '19. So just to illustrate the sharp growth achieved by Soitec over the past 3 years. Fiscal year '20 sales represent more than 2.4x the level of sales achieved in fiscal year '17.So let me now give you a quick update on 2 events which took place at the end of the quarter. First of all, as part of the Nano 2022 plan and under the frame of the French PIA, Programme d'investissements d'avenir, we were granted EUR 200 million, 12-year loan by the Banque des Territoires. Banque des Territoires is part of French state on Caisse des Dépôts. Nano 2022 is the French component of European program designed to support the development of the microelectronics industry. So the drawings of this EUR 200 million facility will be phased within the next few years. Just to preside, there was no drawing at March 31. They will contribute to the financing of our industrial capacity in France as well as our R&D programs.The second event was the long-awaited completions of our withdrawal from our solar business in South Africa. We finalized the sales of our 20% equity stake in the project company operating the Touwsrivier plant to one of our South African partner. In the meantime, the outstanding part of our loan to one of the Touwsrivier shareholders was settled. Overall, the final amount was cashed in where in that -- I mean, the final amount that was cashed in were in line with the agreement we had signed last year. And I remind you that the book value of these assets were disclosed in our last financial reports in September 2019. It was approximately EUR 16 million. Now let me say a few words regarding the COVID-19 and our outlook. On the very near term, let me first confirm that we continue to expect around 30% EBITDA margin for fiscal year '20. On the operations side, the good news is that in France and in Singapore, the semiconductor industry has been designated as an essential industry. Our supply chain remains committed to our business continuity.On the business side, we are currently working with all our clients and industry experts to model the underlying growth on our main markets. So regarding the smartphone markets, which is our #1 end market, we are reasonably comfortable with the scenario that anticipates a unit decline of around 10% in 2020. Of course, please keep in mind that the increase of RF-SOI content for latest generations of 4G and even more for 5G phones. Additionally, I mean, we also see strong positive trend coming back in calendar year 2021, so we should be in a position to provide our revenue expectations when we will announce our fiscal year '20 results on June 10. In the meantime, we know we can rely on our strong financial positions, and we will base our future capacity investments on customer commitments and market demand. So in addition, we remain highly confident in the long-term growth prospects of our innovative engineered substrate. And we have increased the number of market segments where our technology and products bring high value. And our business is driven by key markets such as 5G, automotive innovations, artificial intelligence, IoT as well as data center and mobile infrastructure. So amongst these strategic end markets, we continue to believe that 5G deployment is, without a doubt, the most powerful long-term driver, whether related to next generations of smartphones or the development of 5G networks with 5G base stations. As you know, we have a series of wafers which will benefit from 5G ranging from RF-SOI to POI and from FD-SOI to GaN wafers. So this ends our opening remarks, and we are now ready to answer your questions. Operator, if you want to...

[Operator]

[Operator Instructions] The first question comes from Ken Rumph from Jefferies.

[Kenneth Charles Rumph, Equity Analyst]

Glad we are all well. I had a couple of questions. Firstly, just on EpiGaN and the extent to which kind of its program, which is obviously at the sort of much earlier stage than the rest of the business, is affected by events at the moment. Then more generally, for the group, in terms of working from home, insofar as it's possible to tell, and I guess we've had several weeks now. How is kind of productivity, absenteeism, people having to self-quarantine and maybe not work? Just a sense of approximately how do you feel? Is there a sort of general loss of kind of efficiency to some degree in working from home, for those parts of the business that can?

[Paul Boudre, CEO & Director]

Yes, and thanks for the questions. And yes, and thanks for the remark on being in good health. And I wish all of you guys, by the way, to stay safe and healthy. But we, at Soitec, we -- maybe let me start with the EpiGaN. So as I said, we have been working and without any disruptions at all our sites, and this includes also EpiGaN. So that's very, very important. And we have been applying the safety and measures even well before some regulations came in place because we were learning from what happened in Singapore in January, February. So very early on in the process, we were able to put in place the necessary measures for -- to protect our people. So all the people in the clean room are working in the clean room. All the people that have no reason to be in the factory have started to work from home in a very efficient way. So we, in terms of EpiGaN, the -- I would say that the integration since we have now this company more than a year now. The integration is well underway, and we continue to be very, very happy with what we see. Obviously, we are focusing the first step into high-volume manufacturing for RF and for 5G base stations. And the next step will be on power for auto and industrial. So a lot of good lead right now and qualifications underway. We should see towards the end of the year and specifically next calendar year, some significant numbers coming from this group again. Regarding the overall efficiency, and I will say that we have been able to maintain in Singapore and in France and in Belgium, a very high level of people in the factory. I would say, 70%, which is pretty good numbers. Singapore has been -- we have been dealing with all the regulations. And you know that the border in Singapore have been also shut down, so we have operators, technicians from Malaysia that are hosting in hotels, and we have taken care of this. And this is running pretty okay, I will say, very impressed by the overall efficiency. And the thing is that the teams have remained very, very motivated and engaged. So we -- our people understand that Soitec is supplying critical market segments, and this is keeping very high motivation within the organizations. We are the foundation of 4G and 5G. I used to say, 3 years ago, there is no smartphone without Soitec, this is true today. But I can say, again, today, there is no 5G without Soitec. And so the motivation of our people is clearly very high.

[Operator]

The next question comes from the line of Jerome Ramel from Exane BNP Paribas.

[Jerome Ramel, Analyst of IT hardware and Semiconductor]

Paul, quick question on your comment that maybe the smartphone market will decline by whatever, let's say, 10%. But you said, you -- I had in mind that your RF content through the cycle could grow anywhere between 10% and 20%. Is it still a number we should have in mind for the coming years, thanks to the migration to 5G and the new POI opportunities?

[Paul Boudre, CEO & Director]

Yes, absolutely. This is what we said, and this is what it is, yes. And as you go into 5G, I mean this is clearly true. And even sometimes higher than that.

[Jerome Ramel, Analyst of IT hardware and Semiconductor]

Okay. And could you tell us what was the exposure of Soitec per end market for fiscal 2020? Should we assume a smartphone/RF around 60% and automotive around 15%? Is that the right kind of number we should think about?

[Paul Boudre, CEO & Director]

Yes. Clearly, maybe a little bit more in RF, but this is particularly a ballpark year end. This is correct.

[Jerome Ramel, Analyst of IT hardware and Semiconductor]

And maybe final question on the comment you made in the past of potentially a third foundry ecosystem being Chinese-friendly coming. Could you update us on the potential situation there? And what we could expect in the coming months or quarters?

[Paul Boudre, CEO & Director]

Yes. We are still -- and that's amazing because even if, obviously, all the communications were kind of slowing down or more difficult, we continue. We have never stopped working and not only at Soitec, but partners that are engaged into these discussions in China. And I will say that we are on track to basically in the first half of the year to get some first step of achievement. So as far as I can share, I mean, I would say that we're on track in order to continue the -- to work on the ecosystem in the second part of the year. And again, several will be part of the -- in summer we should know more.

[Operator]

The next question comes from the line of Karina Sutija from Arete Research.

[Karina Alexandra Byrkjeland Sutija, Former Analyst]

Congratulations on your year-end results. I'm just wondering, I mean, you kind of reconfirmed your 30% year-over-year growth for fiscal '20 a few weeks back, and I'm just kind of trying to understand what kind of changed in the last few weeks. Obviously, the sort of mix was very immaterial and currency kind of made up for it. But just kind of looking into June, in terms of the impact from COVID-19, I mean it sounds like from the supply perspective, most of your fabs are -- or manufacturing is up and running. I mean is there sort of something else in terms of ordering that we should be aware of moving into June? Or maybe if you can sort of talk a bit about what you expect in terms of your order visibility into the next quarter would be great, even though I know you don't give guidance, but just some high-level thoughts will be great.

[Paul Boudre, CEO & Director]

Yes. Thank you, Karina. Yes, the logistics has been a little bit complicated, that's the least I can say and specifically towards the March. And we had a lot of logistics to a completion to realize over the last 2 weeks of the quarter. So we missed a little bit of some of them, but basically our manufacturing delivered on time, and we were basically on track to exactly meet the guidance, but we came a little bit, I won't say short because around 30% and 28.3%. I will say that we are extremely pleased with the result because the last month has been -- the last months, and speaking specifically in March, has been extremely difficult. But clearly, this is outstanding performance and record again, a quarterly record for this company ever. No. We are not, obviously, commenting on our quarterly sales. But maybe the one thing that I would like to share with you is that we have not seen yet order cancelations. And we know that there is potentially, I mean, a bumpy road ahead because everybody is chasing the information, and we are too. But the more information we will gather, I mean, we will share all this with you in June in more details. But again, that's what I can share with you. And our customers are clearly running at expected pace right now, okay? All the supply chain is really running.

[Karina Alexandra Byrkjeland Sutija, Former Analyst]

Makes sense, yes. And maybe just for my second question on POI. You've spoken quite a bit about sort of the traction you're seeing for that new filter technology in the last quarter. I just wanted to hear if you can quantify the revenue contribution from that? Or maybe even sort of share what you expect in terms of seasonality for the POI filter moving through the year? Is there any way you can sort of highlight anything on POI will be great.

[Paul Boudre, CEO & Director]

Yes. So what is clearly true today is that we have and we started very, very -- at a very little level, but in December to get the first purchase order recognitions on POI. But the new adoption is coming to us very, very fast, so it's still not significant in the first quarter of this -- the last quarter of this fiscal year. But as we go towards the end of the fiscal, we should clearly see the adoptions growing very fast. We have no seasonality during this growing phase. I mean it's purely the fast adoptions going into 4G and 5G. And what we are very pleased with is that you start always with one customer, but we have now several customer engaged into this platform, and this is clearly a very big focus in the company.

[Operator]

The next question comes from the line of Emmanuel Matot from ODDO.

[Emmanuel Matot, Analyst]

Yes. So several questions. First, you made a fantastic Q4. At the same time, we have seen volumes of smartphone sold falling by 30%, 40% as from February. Do we have, therefore, to worry about the level of RF-SOI inventories in the value chain, meaning at your customer side?

[Paul Boudre, CEO & Director]

Yes. No, this is a good questions, and we are tracking and following this. We do not see, I mean, we -- I mean, clearly, there is one month that has been clearly impacted on the sales. But you can already see today that China is quickly recovering.We have to look and understand that, obviously, the impact on Europe and U.S. But there is one to maximum 2, but we don't believe in the 2 quarters delay. We do not see the critical situations on the overall inventory in the supply chain.Yes, there is some inventory being made, but this is not so far critical as we see it. And as I said, we are working on a scenario of this minus 10% on smartphone for calendar year 2020, which is clearly the base scenario that we are currently looking at.

[Emmanuel Matot, Analyst]

Okay. Second, I know you will guide for fiscal year 2021 next June. But maybe you can tell us, Paul, if you believe you are still in a position to outperform significantly the semiconductor market this year? Is that something still achievable for you?

[Paul Boudre, CEO & Director]

And what we demonstrated in this last quarter is that, clearly, we have a lot of tractions from the market. And yes, there is -- we expect a strong seasonality. And we will have, after a week H1 fiscal year, we have -- we are expecting a very strong H2. And what we see coming is a very, very strong calendar year '21. And so back to the previous questions also, I think that there is a momentum on 4G, 5G and the infrastructure, but also when there is a slowdown in our industry or when is there disruptions, the way we are going through, one thing that is critical in the entire supply chain is innovations, and 5G is going to happen. And clearly, around 5G, obviously, we will see more applications coming in the calendar year '21 and '22. So we are positioned in the right market segments, 5G, edge computing, IoT data centers, auto and so the answer is clearly, yes, we are in the positions to outperform the market, yes.

[Emmanuel Matot, Analyst]

Okay. And my last question, maybe can you tell us where you are in the process of developing a breakthrough technology for silicon carbide? Anything new to say?

[Paul Boudre, CEO & Director]

So you can imagine that it has been also an interesting time for R&D project. But we have been working in this Phase 1 this H1. We say that we're on track with what we said we will do, which is basically a pilot line in H1 and sample in H2.We are very confident on the technical progress we have made and basically even the last 3 to 4 months. We have a basically a virtual pilot line, working with our suppliers and internally as well, and we didn't stop. So I think that we are on track, and we know that there is a lot of interest from the value chain and the end customers, and we continue to perceive great tractions in all the discussions we have right now.

[Operator]

The next question comes from the line of Aleksander Peterc from Societe Generale.

[Aleksander Peterc, Equity Analyst]

Can you hear me now?

[Paul Boudre, CEO & Director]

Yes.

[Aleksander Peterc, Equity Analyst]

Okay. Sorry. There's something that went wrong with the audio. I just wanted to check with you, first of all, on any precautionary orders that you may have seen elsewhere in the industry? Because we hear from various protagonists that everybody is increasing their buffer given the challenges in logistics. So have you seen that as well? And will that maybe then translate into lower orders down the road in the coming quarters?Secondly, on your logistics issues, do you still see them now towards the end of April? Or were you able to mitigate that to an extent? And then just a final question by verticals. I hear what you say about the smartphone market, that's a big chunk of your revenue. But when you look at the rest, do you see strength in data centers offsetting the relative weakness or very big weakness in automotive? Or how should we think about the verticals there?

[Paul Boudre, CEO & Director]

Yes. So regarding the logistics, we clearly are back to, I would say, not normal because we have been forced and obliged to change our routes for some of our customers. But technically, we are back to normal deliveries in terms of -- so this is not a blocking point anymore. The buffer, the increasing buffer that you are talking about, I mean, clearly, it's hard to tell, okay? Because that we are not accelerating or we are not decelerating. I mean, clearly, we are manufacturing today based on the contractual agreement and purchase order and discussions that we have with our customers right now. So there is no strange movement in our supply chain. So it's hard to tell. But clearly, we expect some weakness in our Q2, potentially, and -- but we don't know yet. And we see a strong H2 coming to really go into a very, very strong calendar year '21.So back to your questions regarding the strength in data centers with silicon photonics. It is going in the right directions. But it's a smaller business, and we don't expect this to really compensate what we see coming in the phones. That's what I can say, right? I mean for the RF market, what is clearly the good news for us is that it's a content growth rate. I mean, you know that. And we have seen it in 4G, and this is even more visible in 5G. So the content of RF-SOI is clearly the main driver for us.

[Aleksander Peterc, Equity Analyst]

Excellent. And can I just follow up very quickly on kind of a multiyear outlook? I mean my understanding previously was that fiscal year '21, which is starting now, will be -- will see lower growth. That was kind of a pre-COVID comment, so I know you're going to adjust that, but weaker to '21 and then reacceleration in your fiscal '22. Is that still the scenario that we should model?

[Paul Boudre, CEO & Director]

Absolutely. Yes, absolutely. But we will give you more visibility in June.

[Operator]

[Operator Instructions] And the next question comes from the line of Jerome Ramel from Exane BNP Paribas.

[Jerome Ramel, Analyst of IT hardware and Semiconductor]

A follow-up question on my side, Paul, You mentioned end of last year that we were entering a kind of plateau for FD-SOI, but you were expecting some momentum to be regained by the end of this year. Could you update us a little bit on what you see in terms of development for design wins? And potentially new markets for FD-SOI, specifically?

[Paul Boudre, CEO & Director]

Yes. So no change in my last comment. I think that this is what we continue to see and to believe. The good news is really in terms of design wins that we see at our foundry and customers level. What we see -- I mean, what we see happening, and this is the second wave that I was talking about, it is really focusing on edge AI and innovative also application in the auto.But also now, we see this platform getting into millimeter wave applications, and with now multiple customers getting into this type of technology. So exactly what I said, we are in this form of plateau. I mean, running the wave #1, the second wave is now starting. And from design win to manufacturing is 12 to 18 months, but that's what it is. And we are very confident, again, that by the end of our fiscal year and clearly, in calendar year 1 '21, we will be enjoying another growth here.

[Operator]

And the final question in the queue comes from the line of Robert Sanders from Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Yes. So just coming onto fiscal '21, it does look like revenue is probably going to decline if smartphone and auto is 80% of your mix, given your own planning assumption. So -- and 50% of your COGS is fixed and most of your OpEx. So presumably, your EBITDA margin is going to come down into fiscal '21, but then you have this growth opportunity in fiscal '22. So what are you actually doing internally? Are you stopping hiring? Are you slowing expansion? Are you battening down the hatches to preserve profitability in fiscal '21? Or are you looking forward to fiscal '22? And I have a couple of follow-ups.

[Paul Boudre, CEO & Director]

Yes. I mean, clearly, we will give you more color again in June, and I'm sorry to again put that into this. But clearly, this is where we are going to share more of these information. We -- don't forget that we bring new technology to the market right now. And these technologies are high-value technologies. So we continue to foresee, not only strong market share on these new platforms and specifically the most advanced platform, including for 5G, high level of market share, high-value technology.So we feel that we have a pretty good position when it comes to the overall financial performance that we would like to achieve in fiscal year '21, but we will share more in June.

[Robert Duncan Cobban Sanders, Director]

Got it. But can you say anything whether you're moderate in CapEx or OpEx? Or you're deferring that until June?

[Paul Boudre, CEO & Director]

Clearly, we are controlling our OpEx for sure. I mean we have and we are maintaining all our efforts on strategic R&D, so we will not slow down on strategic R&D. We will basically take the right actions in OpEx. And when it comes to CapEx, clearly, this information will be disclosed in June. But it will be in line as -- it will be in line, as I said, with what customer commitments and the market demand trend that we see for calendar year '20 and '21.

[Robert Duncan Cobban Sanders, Director]

Got it. Just last question would just be on fiscal '22. You've said EUR 900 million as a goal, but I think clearly, that's unlikely now. So when are you going to be in a position to update that fiscal '22 guide? Because presumably, you're going to have to do another demand forecasting roll-up and come to a view. I think last time you gave it to us in June. So will you give it with the June results an update to that fiscal '22 view?

[Paul Boudre, CEO & Director]

Yes, we'll give some color in June, and clearly, you would have enough indicators and when it comes to CapEx and the trend, we are going to drive this calendar year '20 -- fiscal year '21, so just be patient. I mean this is coming. But this is -- and we are excited about what we see coming. So we are -- we'll be pleased to share that with you in June.

[Operator]

That was the final question in the queue. So I'll turn the call back to your hosts for any closing remarks.

[Paul Boudre, CEO & Director]

So if there is no maybe further questions, I can maybe get into the final remarks for me. And before moving to the agenda, I would just like to remind you our record sales achieved in Q4 and the fact that Soitec's growth is based, in particular, on the success of our RF products, notably in the context of 4G and 5G adoptions. So additionally, Soitec will benefit from the ongoing adoptions for our digital product platform for AIoT and the multiple waves of innovations that are taking place in the automotive market.So this ends this call, let me just give you our next date in the agenda. And our -- on the upcoming agenda, we -- and regarding our fiscal year '20 results will be published on June 10 after the market close. And I would like, sincerely, to thank you for being on this call. Please stay safe and in good health wherever you are and for -- to you and to your beloved. And it's an interesting time, but this industry is kind of magic, so let's see how it goes. Thank you very much.

[Operator]

Thank you for joining today's conference. You may now disconnect.