X Fab Silicon Foundries EV

PAR:XFAB

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the X-FAB Q2 2024 Results Conference Call. My name is Ellen, and I will be your coordinator for today's event. Please note, this call is being recorded. And for the duration, your lines will be on listen only. However, you have the opportunity to ask questions at the end. [Operator Instructions].



I will now hand you over to your host, Rudi De Winter, CEO, to begin today's conference. Thank you.

[Rudi De Winter, executive]

Thank you. Welcome, everyone. Today, in the conference call, we also have Alba Morganti, CFO.



In the first quarter of 2024-- sorry, in the second quarter of 2024, the revenues were $205 million down 9% year-on-year and 4% quarter-on-quarter, which is in line with the guidance of $200 million to $210 million. Revenues in the core markets, Automotive, Industrial, Medical accounted $190 million, down 4% year-on-year, representing though an all-time record high with respect to the share of total revenues in the portfolio.



The second quarter was marked by a combination of developments on the one-hand demand for 200-millimeter CMOS technologies remain high and the allocation of available capacities continued. In particular, the continued ramp of X-FAB's popular 180-nanometer automotive technology, X-FAB France contributed to the automotive growth in the second quarter with revenues amounting $142 million, up 9% year-on-year. The second quarter CMOS business totaled $166 million, down 8% compared to the same quarter last year, and the decline reflects the demand weakness for 150-millimeter CMOS technologies following expected inventory corrections in the industrial end markets.



As anticipated, silicon carbide revenue for the second quarter declined by 33% year-on-year to $11.6 million after the low bookings in the first quarter. The current weakness is projected to bottom out in the third quarter. Based on customer feedback, a recovery is anticipated to begin in the fourth quarter with a return to robust growth in 2025. Both a weakness in 150-millimeters as well as the silicon carbide impacted the industrial business revenue, which recorded in the second quarter, $34 million down 33% year-on-year. Order intake for the 150-millimeter CMOS technologies started to recover in the second quarter and will be contributing positively to revenue evolution in the fourth quarter.



X-FAB Microsystems business recorded a revenue of $25 million in the second quarter with a strong growth of 21% year-on-year. This was mainly driven by the ramp of next-generation automotive headlamp applications.

Medical revenues came in at $13 million, down 18% year-on-year. Apart from normal fluctuations, the decline is temporarily affected. The temporary effect relates to the need to allocate CMOS capacities. Going forward, medical revenue is expected to return to solid growth based on new design wins, high-demand applications as well as strong medical bookings in the second quarter. Overall, X-FAB recorded strong quarterly bookings amounting to $248 million, up 12% year-on-year. This reflects the robust demand for 200-millimeter CMOS and microsystems technologies as well as an uptick in the 150-millimeter CMOS demand. The latter primarily related to industrial and medical end markets.



Backlog at the end of the second quarter came in at $270 million compared to $220 million at the first quarter. Quarterly prototyping revenues totaled $21 million, down 24% year-on-year, mainly influenced by the silicon carbide activity where also engineering and production safe launch were up on the low side. The revenue at the full-year guidance mainly reflects the delayed recovery of the silicon carbide business. Despite the temporary effect, X-FAB remains confident in the long-term prospects of its silicon carbide business with a projected increase in EV sales long term, the greater adoption of silicon carbide in inverters, and the anticipated completion of customer destocking. X-FAB expects a return to strong silicon carbide revenue in 2025.



Business fundamentals are intact and X-FAB remains well positioned for long-term business success. X-FAB's comprehensive and highly specialized technology portfolio enables innovative solutions to address the major megatrends of our time. The electrification of everything is inevitable to move away from fossil fuels and mitigate climate change, driving long-term growth in X-FAB Automotive and Industrial business.



Aging and growing populations require technological innovations to make prevention, diagnosis, and treatment of diseases more efficient, reliable, and accessible to an ever-growing number of people. X-FAB Microsystems' expertise with a combination of CMOS and MEMS supports this development of world-leading medical applications and fuels the long-term growth of X-FAB Medical business.



The capacity utilization, let's move to the operations side. The capacity utilization of X-FAB factories varied by technology. 200-millimeter CMOS lines, especially those producing the high-demand 180-nanometer technologies were running at full load, while the 150-millimeter CMOS fabs recorded lower utilization rates in line with the current demand. In the second quarter, X-FAB continued its capacity expansion programs. The total capacity expenditure for the second quarter amounted $122 million.



The building construction at X-FAB Sarawak in Malaysia to create additional clean room space is on track as is the plan to start moving in equipment in the fourth quarter. X-FAB France continued to expand capacity with new equipment coming online, both sites manufactured X-FAB popular 200-millimeter CMOS technologies, and it is essential to increase the capacity to better meet our customer demand.



The silicon carbide capacity expansion at X-FAB Texas was slowed down in the second quarter in response to current market demand, reflecting X-FAB's approach of gradually increasing capacity in line with identified demand and long-term customer commitments. There is still strong long-term interest in silicon carbide in corresponding capacity. However, there will be a shift in time.



Now I would like to pass the word to Alba for the financials.

[Alba Morganti, executive]

Thank you, Rudi. Good evening, ladies and gentlemen. We will now move to the financial update. I would like to start the financial section by highlighting that the second quarter totalized USD 205.1 million sales, which was within the guidance of $200 million to $210 million and representing a decrease of 9% year-on-year and 4% quarter-on-quarter.



The second quarter EBITDA was almost $48 million with an EBITDA margin of 23.3%. If we exclude the positive impact from revenues recognized over time, the EBITDA margin of the second quarter would have been 22.7%, which was then at the higher end of the guided 23%. Our profitability is not affected by exchange rate fluctuations as our business continues to be naturally hedged. At a constant U.S. dollar-euro exchange rate of $1.09 as experienced in the previous year's quarter, the EBITDA margin would have been the same.



Our cash and cash equivalents at the end of the second quarter remained strong and amounted to $290.1 million. The financing of our capital expenditures for all our ongoing capacity expansion program through 2025 is secured by our available cash reserves in combination with credit facilities, prepayments received from the customers with long-term agreements, and last but not least, operating cash flows, each of which accounting for approximately 1/3 of our total cash requirements.



For the additional capacity that we are building as part of our expansion program, the corresponding business has been identified, either as part of the long-term agreement or as part of a customer forecast for existing products, which are in high demand, that confirms that our CapEx strategy is good.



Now a more technical explanation. Based on the amendment to international accounting standards, IAS 1, regarding the classification of liabilities as current or noncurrent, we changed the presentation of the borrowings under our multicurrency revolving credit facility of EUR 200 million, which were classified as current until December 31, 2023. But as of January 1, this year, we reclassified these obligations as noncurrent. And of course, we had to do it also retrospectively. Therefore, the balance sheet as of June 30, 2023, December 31, 2023, have been restated to reflect this change, whereby the outstanding position under our EUR 200 million multicurrency revolving credit facility, respectively, amounted to $180.9 million and $192.7 million. They were both reclassified from current to noncurrent borrowings.



And to conclude this financial section, I would like to share our guidance for next quarter and give you an update on full year's perspective. For the third quarter of 2023, the outlook revenue is expected to come in within a range of $205 million to $215 million, with an EBITDA margin in the range of 24% to 27%. The guidance is based on an average exchange rate of USD 1.07 to euro and does not take into account the potential impact related to IFRS 15.



In light of the still ongoing softening of demand, we adjusted our full-year revenue guidance from $900 million to $970 million to $860 million to $880 million, which mainly reflects the overall delayed recovery of the silicon carbide power device market. With a slightly adjusted top end, the full-year EBITDA guidance range has also been narrowed to 25% to 28%. Analyzing the third quarter and full-year guidance, you will notice that this implies a further strong growth in Q4 this year for both revenue and margin.



And now I would like to give the word back to Rudi.

[Rudi De Winter, executive]

Thank you. The second quarter results were fully in line with the expectation, reflecting the contrasting market dynamics we are currently experiencing. We continue to see strong demand for our 200-millimeter CMOS technologies and in particularly our 180-nanometer and the unique high-voltage BCD-on-SOI. We continue this technology leadership with 110-nanometer BCD-on-SOI that we released recently.



The CMOS represents the largest part of our business. Therefore, we continue to invest in this unique technology and growing capacities in line with our customer needs that have been identified and secured through long-term contracts. I'm pleased that we have initiated these investments and continue to make good progress in the execution of our expansions.



Another highlight is our microsystems business, where demand is strong and the pipeline is full of exciting applications. While our SiC business experiencing a period of customer destocking, I remain confident in the structurally strong demand for silicon carbide applications driven by worldwide transition to green mobility and green energy. Our leadership in the silicon carbide foundry continues to create great interest by fabless power companies, automotive Tier 1s, and OEMs. It is rather a demand shift in the next years, and I'm confident that our SiC will also return to robust growth.



With this, I would like to terminate the introduction and pass over to the moderator for questions and answers.

[Operator]

Thank you.[Operator Instructions]. We will take our first question from Robert Sanders, Deutsche Bank.

[Robert Sanders, analyst]

Maybe you could just start by giving us the loading by diameter as usual. Sorry, your normal question.

[Rudi De Winter, executive]

Well, the loading by diameter, so on the 200-millimeter, we are fully loaded in the CMOS side, and that's also where our expansions are predominantly happening. In the 150-millimeter CMOS side, the loading has been rather low, somewhere in the 50% to 60% range. However, this is gradually-- I explained that we saw an uptick in 150-millimeter CMOS bookings. And so, over the quarter, gradually that improved. And so, as I said, that should positively contribute in the revenue in the fourth quarter this year.

[Robert Sanders, analyst]

Then STMicro on their call was emphasizing the need to migrate production over 300 millimeters, yet your lead customer, Melexis was stuck on 200 millimeters. I was just wondering what kind of cost advantage do you think could be gleaned by moving to 300-millimeter wafers that safe Melexis-produced chips at STMicro's 300-millimeter fabs.

[Rudi De Winter, executive]

Well, many of our customers have a lot of products and a lot of designs. So like let's say, for instance, Melexis produced 500 different products, and many of those products are running on average volumes. So it is not necessarily a big cost advantage to move to 300 millimeters for products that are not running in high volume. So there's also a big cost associated with such transitions.

[Operator]

[Operator Instructions]. We will take our next question from Trion Reid, Berenberg.

[Trion Reid, analyst]

A couple of questions actually just on the silicon carbide side. I mean you said that you think the silicon carbide business will bottom in Q3 and then start to recover from Q4. I just wonder if you could give some indication of your visibility on this and why you think that recovery will start in Q4. I think in the last call, you sort of projected it might start in Q3. And then my second question is just on your comment around the guidance cut that it mainly reflects silicon carbide. I just wondered if there was anything else you wanted to call out that it also reflects.

[Rudi De Winter, executive]

No, the visibility on the silicon carbide is low than being the expected recovery is based on forecast and signals from our customers. However, it's not yet tangible in orders as we see it today. And so, we expect a further decrease in Q3 based on the orders from that and the wafer starts in Q2. And now the SAP loading is relatively low. So new orders that come in, come in with a better cycle time and so could still be executed and delivered in the fourth quarter. However, the visibility is still loaded on the silicon carbide.



Then your question on how are the other things doing? So in general, all the-- let's say, the correction of the guidance is, I would say, for 3 quarters related to the silicon carbide for visibility and shift up and correction in the inventories. And to '25 quarter, I would say, on the 0.35 micron where we were planning to do additional volumes on outsourcing where actually the demand does not require that, and the customers are reluctant to qualify other sources. So we will predominantly produce in-house those quantities. And so that's another quarter of the correction.

[Operator]

We will take our next question from Emmanuel Matot, ODDO BHF.

[Emmanuel Matot, analyst]

Two questions for me, please. First, can you update us on your CapEx budget for this year? It will go down with some adjustments in Texas for your silicon carbide business. Second, I was just checking my model CCC revenues are still going down quarter after quarter, why? I saw the situation will stabilize, but it doesn't seem to be the case.

[Rudi De Winter, executive]

The second question, you were referring to volumes of what? CCC?

[Emmanuel Matot, analyst]

CCC, yes.

[Rudi De Winter, executive]

With respect to the CapEx, so we are still planning to do around the $550 million guidance that we gave for the full year so that will not deviate too much. Indeed, we are reducing or shifting things on silicon carbide, but that was not the majority of the CapEx was anyhow planned on the 200-millimeter CMOS. We are progressing well there and offer some critical projects where we're trying to pull in where possible. So we do not see a reason to adjust our full-year CapEx spend.



And then with respect to the CCC, yes this is not in focus of the company. This also is somewhat reflects a weaker demand on the RF SOI that we still have some customers which is somewhat lower than expected. But anyhow, it's not an area of focus. And so, all our resources are focused on maximizing the output of 200 millimeter for our automotive customers right now.

[Operator]

[Operator Instructions] We have one more question on the line. We'll take our question from Robert Sanders, Deutsche Bank.

[Robert Sanders, analyst]

Yes. Can you just run through the cost inflation situation just by the different inputs, whether it's wafers, which presumably are getting cheaper, materials like gases assets chemicals, which may be a mixture of things, and the other key sort of elements just so we can think about your profitability into next year?

[Rudi De Winter, executive]

Well, those elements like energy, material substrates, and so forth, there are some positive developments there. Therefore, yes, this also has a positive impact on our overall profitability despite the fact that we are running at lower volumes than anticipated. So this does have a positive impact going definitely for 2024. And that should also help us with good profitability in the second half where we expect a good recovery where the volumes will go up, cost structure might be a bit better than planned. And so, these are good things.

[Robert Sanders, analyst]

But what about wafers? I mean Ticoncarbide, the Chinese are charging $500 now for 6-inch. Seems that number is going down pretty rapidly. The Siltronic has massive excess capacity in 6 and 8 inch. So presumably, you can extract quite big concessions now.

[Rudi De Winter, executive]

Yes. So that's-- but on the silicon carbide, remember, while the market is low now. So we don't buy that many wafers right now. That's the first thing. And secondly, where possible, we work through consigned wafers where also then the wafer substrate cost does not fall on mix-up P&L. On all the other areas, yes, you're right, we take advantage of possibilities of price negotiations with customers.

[Robert Sanders, analyst]

And just lastly, on the smart tech deal, it sounds like that's a consignment deal again where you're not actually bearing any real kind of inventory risk. But are you developing PDKs and all of that sort of thing to design to smart tech? I think one of the challenges smart tech has is that companies want multiple silicon carbide suppliers or mono silicon carbide. They don't want to be beholden to Soitec. So how much actual investment are you putting behind this smart technology to kind of evangelize the technology and get it going?

[Rudi De Winter, executive]

Indeed, so we have consigned the agreement there. We have a handful of customers who are interested in testing and we're launching the necessary tests and qualifications for them to qualify the benefits on their products with the smart tech.

[Operator]

There are no further questions on the line. So I'll now hand you back to your host for closing remarks.

[Rudi De Winter, executive]

Thank you, everyone, for joining the call today, and I hope to hear you back on the 24th of October for the third quarter results. Good evening, everyone.

[Alba Morganti, executive]

Thank you. Goodbye.

[Operator]

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