X Fab Silicon Foundries EV

PAR:XFAB

Earnings Call Analysis

X-FAB Q3 Boasts Revenue and Automotive Growth

In Q3 2023, X-FAB hit $234 million in revenue, a 24% increase year-on-year, and a 3% rise quarter-on-quarter, consistent with the projected $225-$240 million range. The automotive sector surged with a 40% increase in revenue year-on-year, reaching a remarkable $135 million. Additionally, record sales were achieved in the Microsystems business, indicating successful growth momentum. Looking ahead, revenue is expected to range from $230 to $245 million with an EBITDA margin of 25% to 29%.

Overview of Recent Performance

The company's financial narrative spells robust growth, with total revenues clocking in at $234 million, marking an impressive 24% rise from the previous year and a modest 3% increase from the preceding quarter. Core markets contributed $206 million, a remarkable year-on-year surge of 31%. This narrative, however, takes a nuanced turn with bookings slightly dipping to $208 million—4% less than last year and 6% below the previous quarter. While these figures signal a cool-down, the company's substantial backlog of $484 million suggests a strategic avoidance of premature orders by long-term agreement customers in favor of secured capacity.

Segment Performance & Market Demand

The automotive segment's revenue engine roars louder than ever at a record $135 million, accelerating 40% year-over-year. Factories in France have been incubating success, contributing to 91% of site revenues, a leap from last year's 56%. Other business lines—industrial, silicon carbide, medical, and Microsystems have all clocked growth between 7% to 33%, despite minor setbacks in consumer electronics revenues which have fallen by 44%.

Financial Health and Future Projections

The company has shown a disciplined capital deployment with capital expenditures at $84 million for the quarter, forecasted to hit roughly $350 million for the entirety of 2023. EBITDA has outperformed expectations, coming in at $65.7 million with a 28.1% margin, modestly above the 24-28% guidance range. Looking forward, executives purvey confidence in demand, with anticipations for continuous growth, challenging the clairvoyance of future allocations.

Strategic Initiatives and Technological Edges

The forge of innovation at the company remains hot. There's palpable enthusiasm for the silicon carbide business, where their 150-millimeter node has garnered acclaim for exceptional yields, strategically outmatching early 200-millimeter adopters. Though gallium nitride is part of their repertoire, its market significance pales in comparison to silicon carbide's expansive horizon.

Long-Term Vision and Market Rhythms

The company is threading carefully into the future with stable pricing expectations clashing with difficulties in propelling further price hikes. The revenue forecast aligns with end-of-year predictions adjusted to $900-$915 million, with a healthy EBITDA margin of 25-29%. As productions scale, ambitions inflate to eclipse the $1 billion mark in 2024, ultimately gunning for $1.5 billion come 2026. This calculated trajectory maintains a balance between growing operational capacities and meeting market demands without compromising on profitability metrics.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the X-FAB Q3 2023 Results Conference Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to CEO, Rudi De Winter, to begin today's conference. Please go ahead, sir.

[Rudi De Winter, executive]

Thank you. Welcome to the third quarter conference call of X-FAB. So we have in the conference room here, Alba Morganti, CFO; and myself, Rudi De Winter. So the third quarter was again characterized by several new records. We recorded total revenues of $234 million, up 24% year-on-year and up 3% quarter-on-quarter and in line with the guidance of $225 million to $240 million. A portion of the revenue, namely $10 million was attributed to recognition of revenues over time in accordance with the IFRS 15 as announced in the previous quarter conference call.

The revenues in X-FAB core markets amounted $206 million, up 31% year-on-year representing now a share of 92% of our revenues. Demand in the key end markets remained strong. Third quarter bookings were $208 million, while this represents a decrease of 4% year-on-year and 6% quarter-on-quarter. The order intake does not fully reflect the demand due to the long-term agreements.

Due to the high backlog, which amounts to $484 million at the end of the third quarter, the LTA customers prefer not to place purchase orders too far in advance while having secured their capacity via the long-term agreements.

Demand for the 200-millimeter capacity -- demand for the silicon carbide and Microsystems remained strong. The demand for the older 150-millimeter CMOS technologies is on a gradual downward trend and this already over the past 10 years. So this is nothing abnormal. We are replacing this business in our factory in airport by Microsystems business and in Lubbock, Texas by silicon carbide business. This is part of the long-term execution plan for respective sites.

In the third quarter, our automotive business continued to grow strongly with a record revenue of $135 million. This is an increase of 40% compared to the same quarter last year, primarily driven by the production ramp of our X-FAB 180-nanometer automotive process in X-FAB France. In the third quarter, 91% of the revenues generated by the French sites were based on X-FAB Technologies compared to 56% in the third quarter last year.

In addition, a car headlight application was a main contributor to X-FAB automotive growth in the third quarter, boosting automotive prototyping revenue for safe launch production start. We offered a full range of technologies required for power systems, including high-voltage CMOS and silicon carbide application, and we are well positioned to support the transition to electric vehicles, our long-term growth trend for our automotive business.

Industrial revenues for the third quarter were $54 million, up 15% year-on-year, all driven by more electrification. Third quarter silicon carbide revenues totaled $19 million, an increase of 7% year-on-year, whereas silicon carbide wafer shipments went up 38% year-on-year. The stronger increase in wafer shipments is not reflected in the top line year-on-year revenue due to the higher portion of customers that saw their own silicon carbide raw substrates and consign them to X-FAB.

Since the value add by X-FAB remains unaffected, this results in a slightly lower -- in a lower billing but slightly higher profitability. In the third quarter, medical revenues were $17 million, up 26% year-on-year, primarily driven by DNA sequencing application. We are leveraging our MEMS expertise in combination with CMOS for this type of applications and the men's business evolves towards higher value-add Microsystems integrating a variety of functions.

This enables the miniaturization of large diagnostic equipment to handheld or tabletop size. In the third quarter, X-FAB Microsystems business set a new revenue record of $24 million, an increase of 33% year-on-year, demonstrating that the realignment of this business unit towards systems integration is gaining traction.

Third quarter CCC, Consumer, revenues amounted to $17 million, down 44% year-on-year. This overall evolution is a result of our transition plans and market demand. Prototyping revenues in the third quarter came in at $27 million, up 20% year-on-year and flat sequentially.

On the operations side, we can report that we see continued strong demand, particularly for 200-millimeter CMOS, silicon carbide and MEMS technologies. Operational excellence and productivity improvements remain the key to reliably serve our customers. A major operational focus is the execution of the capacity expansion programs across all sites. Although lead times for new equipment are still long, all projects are on schedule.

In the third quarter, capital expenditure came in at $84 million, down 20% against the previous quarter. Considering the planned equipment deliveries in the fourth quarter, total CapEx for 2023 are expected to come in at approximately $350 million. Major expenditure in the third quarter include the capacity expansions and building in X-FAB Sarawak, Malaysia. The capacity conversion of X-FAB France as well as the expansion of the silicon carbide activity in Texas.

With this, I would like to pass to Alba for the financial update.

[Alba Morganti, executive]

Thank you, Rudi. Good evening, ladies and gentlemen. And now let's talk about the financial update. I would like to start this financial section by highlighting that the third quarter was another very good quarter. As Rudi already mentioned, we had again some all-time high record numbers. We achieved an EBITDA of $65.7 million with an EBITDA margin of 28.1%, slightly above the guidance range of 24% to 28%.

As already reported in the last quarter conference call, we are now including some revenue recognized over time in alignment with the IFRS 15 clause. If we exclude the portion of revenue related to IFRS 15, the EBITDA margin of the third quarter would have been 26.8%. Gross profit in the third quarter amounted to almost $70 million, with a gross profit margin of almost 30%, which would have been 29.1% without revenues recognized over time.

Besides the still ongoing good trend, our profitability in the third quarter was also driven by economies of scale, a favorable product mix and last but not least, a good cost control. And now let's go back to the more financial part of our press release. Thanks to the natural hedging of our business, our profitability was unaffected by exchange rate fluctuations. At a constant U.S. dollar-euro exchange rate of 1.01 as experienced in the previous year's quarter, the EBITDA margin would have been 0.3 percentage points lower. Our cash and cash equivalents at the end of the third quarter amounted to $391.3 million, showing a decrease of 11.4% if we compare those numbers to the end of the previous quarter. But actually, the second quarter of this year has been extraordinarily strong as we cashed a major portion of the prepayments received from our customers with long-term agreements.

Furthermore, this decrease in cash and cash equivalents reflects the cash outflow related to investments to sustain our expansion projects made in the third quarter. And to conclude this financial section, I would like to share the guidance for the next quarter. We forecast our revenue to be in the range of $230 million to $245 million, with an EBITDA margin in the range of 25% to 29%.

We don't expect any additional portion of revenue recognition over time in Q4. Taking into account the year-to-date results and the Q4 guidance, we end up for the full year, including IFRS 15 to $900 million to $915 million revenue with the range -- within the range and with 27% to 28% EBITDA margin slightly above previous full year guidance.

The aforementioned guidance is based on an average exchange rate of 1.06%, U.S. dollar to Europe. And now I would like to give the word back to Rudi.

[Rudi De Winter, executive]

Thank you, Alba. So to summarize, the third quarter was characterized by strong revenue growth in X-FAB's key end markets with our automotive business, again, leading the way with 40% year-on-year increase. The successful transformation of our business keeps contributing to increasing profitability driven by economies of scale and a favorable product mix.

The highlight of the third quarter was the record sales in Microsystems business, and I'm very proud of the system integration capabilities and the expertise that we have built up, it is now starting to pay off and offers great opportunities for future continued growth across various end markets.

Operator, we are now ready to take questions.

[Operator]

[Operator Instructions] And our first question comes from Michael Roeg of Degroof Petercam.

[Michael Roeg, analyst]

First of all, I have 2 questions for Alba. The first one is on the remark you made that there will be no additional sales recognition over time. Do you mean to say that it will remain at $10 million in Q4 or that it will be 0?

[Alba Morganti, executive]

No, it will be 0 in Q4.

[Michael Roeg, analyst]

So your guidance for sales suggests at the midpoint, a small increase quarter-on-quarter. But if you look at the underlying trend, it's actually better.

[Alba Morganti, executive]

Yes.

[Michael Roeg, analyst]

Good. Clear. That's interesting. Then the second one is about, well, that's subsidy of $80 million. The press release reads that it will be over a period of 5 years. So if I make a calculation on average $4 million per quarter, can you tell us what the time frame of the payments will be and how you will account for that in the P&L? Is it revenue? Or is it a deduction of your gross R&D costs?

[Alba Morganti, executive]

Yes, it's a reduction of cost.

[Michael Roeg, analyst]

Okay. So basically, R&D, what you have today, minus [ 4% ] on a quarterly basis.

[Alba Morganti, executive]

It's reduction on the production cost actually. The -- all the subsidies are going to decrease our production cost.

[Rudi De Winter, executive]

Well, this is a bit of a mixture. So the -- what the [ IPSA ] is there are elements where there are equipment purchased and in those cases, it indeed reduces a bit the cost of production depreciations. And then the R&D programs there and the staff is then deducting R&D costs. We do not assume that it will be additional reductions versus the current because also today, we have R&D subsidies left and right, that are also included or netted into the R&D cost of today.

[Michael Roeg, analyst]

Okay, clear. And should we assume that this $80 million will be smoothly paid out over that 5-year period? Or will there be bumps from now and then with, 0 and large numbers?

[Rudi De Winter, executive]

The bumps from now and then I would not be able to answer right now exactly how that looks like over the next 5 years. I think it maybe also a bit more towards the end than the beginning, I think it's more backloaded.

[Michael Roeg, analyst]

Okay. That's very helpful. Then a question for Rudi on your business outlook. Several IDMs and fabless companies recently reported their Q3 results and outlook for Q4. And there is quite a slowdown across some end markets. You're pointing to growth in Q4, further growth and even underlying stronger than what [indiscernible] when you adjust for those contracts over time. Are there any pockets of weakness that you see when you're talking to your customers?

[Rudi De Winter, executive]

Well, it varies to end markets. So the Automotive, in general, remains strong. Medical is also mainly driven by new applications that are ramping up on the, let's say, more -- the consumer is indeed weak but it works well because we are transitioning our capacities to more automotive core business. So -- but on top of that, the consumer demand, I must say also remains weak.

And we do see here and there customers who maybe overestimated their demand a year ago. But considering the strong demand overall, we still see we are able to reallocate those capacities to other customers who have maybe been more into the allocation. And so that is readjusting.

So net off, we still see good demand going forward. So that's -- so we will keep a good utilization of 200-millimeter CMOS capacity in the silicon carbide and MEMS. However, yes, that we see here and there customers who do not take their initial forecasted volumes.

Now if we look to next year, customers remain positive, and they expect that these things are coming back. Now if you see across the industry, you see also that in many areas, business is weak and people think they're kind of across in the consumer field, yes, going or experiencing now the peak weakness. So I'm positive going forward, but of course, there's a lot of uncertainty in the world. And so this is kind of hard to predict how that all plays out.

[Michael Roeg, analyst]

Okay. And then you mentioned allocation. Is there still a lot of allocation? Or has it come down much in the past 3 months?

[Rudi De Winter, executive]

There is -- we still have here and there customers who say we would like to have more than what we can produce. So yes, there is still allocation, but it is -- the gaps are getting smaller.

[Michael Roeg, analyst]

Okay. Well, then my final question before I leave the floor to others. A bit of a -- yes, throughout this year, when you've given your guidance on a quarterly basis, the gap between the low end and the high end was $15 million, 1-5. Last year, it was only $10 million. And the year before, it was sometimes even smaller. So why have you actually increased that guidance range this year?

[Rudi De Winter, executive]

Well, the overall revenue is also going up so as a percentage, it's not changing that much.

[Michael Roeg, analyst]

Like your backlog is quite big. So you have -- should have quite some good sites into your supplies.

[Rudi De Winter, executive]

The tolerance, yes, it's mostly driven by the operational execution. And so that is not only the demand that is playing here. So the biggest portion of the uncertainty is the operational execution. So depending on how well the factories are running that determines the revenue more or less. And beside a bit of demand side for the 150-millimeter older CMOS technologies.

[Operator]

And our next question now comes from David O'Connor from BNP Paribas Exane.

[David O'Connor, analyst]

Maybe two on my side. Firstly, Rudi, just going back to that kind of gap that you still have between supply and demand. How many more quarters do you think given the orders that you're seeing, how many more quarters before you think that?

[Rudi De Winter, executive]

It's hard to predict. If we look at the forecast that our customers give they -- yes, then it's -- we're ramping up production, but the forecasts are going up, and so we're kind of just on the verge where this demand remains strong, and then we kind of just in line with the supply or just below. So that's -- we'll have to see how next year turns out if -- but based on the forecast, this is still tight.

[Operator]

I think we have lost the connection to Mr. O'Connor. [Operator Instructions]

[Rudi De Winter, executive]

We'll wait a bit until David O'Connor is back.

[Operator]

[Operator Instructions]

[David O'Connor, analyst]

Sorry for that, the call dropped. Maybe I'm not sure if anyone subsequently asked. I just wanted to ask around the gap between supply and demand that you're seeing, Rudi, just wondering how many more quarters before you see that kind of abating and [indiscernible].

[Rudi De Winter, executive]

Yes. So as I said before you dropped out, the -- based on the forecast, we see continued increasing demand for next year. So in some cases, customers tell us, okay, we take a bit less now in Q3 and Q4, but next year, it's going to be again up due to inventory corrections. We can reallocate those quantities to other customers. We still have gaps. And -- the -- so -- but for next year, demand is expected to continue to go up. And so in line with our capacity expansion. So I think that we are just on the verge and it's hard to tell whether there is still allocation or not next year.

[Operator]

We have now a question from Johannes Ries of Apus Capital GmbH.

[Johannes Ries, analyst]

Maybe One or 2 short questions. First, for clarification, if I go on the presentation, you still have the old guidance with a wide range of $880 million to $960 million in sales and margin, '23 to '27. But if I got it right in the presentation, if I sum up the Q4 guidance, I come to closer figures, $880 million to $905 million and margin above '27. Is that is right.

[Rudi De Winter, executive]

Yes, yes.

[Johannes Ries, analyst]

Still your guidance in was a little bit misleading.

[Rudi De Winter, executive]

Yes. But yes, if you take the year-to-date numbers and you have the guidance for Q4, you end up with what Alba told before.

[Johannes Ries, analyst]

Yes. Only for clarification is clear. Maybe a question on your fab in France. If [indiscernible] my head, you are close to reach breakeven here. therefore, and you more and more filling up now with higher-margin business, automotive and industrial and so on. Therefore, I think for me automotive as I know. So far, maybe how is the steps now to bring it to the average margin? And what means is for the average margin at all, it must go up.

[Rudi De Winter, executive]

Yes. So -- but we are still on that slope to improve the profitability of the Fab in France, which comes with economy of scale and more volumes out of that fab, and we are still in yes, still on the -- growing that business. So the output of the factory in France is now back at a level where it was maybe 4 years ago when it was running a lot of our only consumer business. So we have gone through that transition. But now we are at a point where we have to continue to grow the output and the output still needs to double over the next 2 to 3 years. So that gives you the -- an indication of the economy of scale that is still there and still has to come.

[Johannes Ries, analyst]

And if you double the output, then you come also to the average margin of the rest of the business. Okay. And that could lead also maybe your total business above 30% EBITDA margin or you have got...

[Rudi De Winter, executive]

Yes. So that is -- of course, we are investing. So this growth in capacity comes also with all the equipments we're installing, so that increases the depreciations. And therefore, it's important that also our EBITDA targets continue to go up to -- because our depreciations will also continue to go up.

[Johannes Ries, analyst]

And on the silicon carbide business, you explained there's a mix in how the business is done. So you got the waiver from the customers. Therefore, you have maybe higher profitability, but not top line growth. But since maybe this transformation will be over in some times, therefore, whatever growth we can expect for the future because you have very ambitious targets. I can remember, figures of $200 million and in longer term $400 million in the silicon carbide business.

[Rudi De Winter, executive]

Yes. So the -- we expect that this mix change between consigned wafers and X-FAB acquired supply chain, that will not further swing into the direction of more consigned. I think we reached a point where from now on the growth in wafer output and revenue will be more -- the growth in wafer output will also be reflected in the revenue growth.

[Johannes Ries, analyst]

Super. And still these figures are not wrong. I said here for midterm long-term ambitions in this business.

[Rudi De Winter, executive]

Yes, we remain very excited about the silicon carbide business. We are in 150-millimeter which is maybe the more traditional [ node ] for silicon carbide, but we have very good yields and our customers are very excited about the die yield and so forth that we achieved. So we have here a great advantage versus the early adopters of 200-millimeter.

[Johannes Ries, analyst]

Right. And gallium nitride, you also produce, but it's not so important. I saw -- as we that you all join in this business, which has higher growth rates than silicon carbide.

[Rudi De Winter, executive]

Yes. But the market for gallium nitride is way smaller than silicon carbide. We are -- in 2 of our sites, we are into gallium nitride, in one site in production and the other side in development where we expect to ramp up first production in the second half next year.

[Johannes Ries, analyst]

Small but strong, growing.

[Rudi De Winter, executive]

Yes. But be careful at the gallium nitride market is significantly smaller than the silicon carbide market. So there will be strong relative growth. But on the top line, it will not have such a big impact. The silicon carbide impact will be way stronger than the gallium nitride impact.

[Johannes Ries, analyst]

Maybe a final question. From a pure capacity, what is at best possible to produce [indiscernible] lets you assume stable pricing, what is right. Maybe let's start first with the pricing topic. I was also on the call with Infinium Automotive this morning in ST. They've seen more normalized pricing, but no pressure on prices. That's also what you're seeing.

[Rudi De Winter, executive]

Yes. That's also we expect for next year, yes, no exceptional pressure on pricing. So it will be hard to push through further price increases, but we expect pricing to be stable next year.

[Johannes Ries, analyst]

So coming back to the question, I want first to ask the final one for me. Given what you plan on CapEx and maybe stable pricing, what is maybe at best the revenue from a capacity side, you could maybe achieve next year now? What is maybe the limitation from your production capacity.

[Rudi De Winter, executive]

Yes, I would prefer not to answer that question. So the -- well, we always said, okay, we want to exceed the $1 [ billion ] in 2024. We're building up capacities that we set in our Capital Market Day that should bring us over time to $1.5 billion in 2026 from a capacity perspective. So we will continue on this path, but yes, as we are growing, the slope -- so every quarter, there will be -- we expect a gradual increase quarter-over-quarter, but we will report on our expectation for 2024 in the next conference call.

[Operator]

[Operator Instructions]

[Rudi De Winter, executive]

Yes, if there are no further questions, then maybe we...

[Operator]

No further questions at this time. So I'll hand it back to yourselves.

[Rudi De Winter, executive]

Okay. Thank you very much, everyone, for joining the call today. And we look forward to hear you 8th February for the full year review. Thank you, and have a nice evening.

[Alba Morganti, executive]

Thank you. Goodbye.

[Operator]

That concludes today's call. Ladies and gentlemen, you may now disconnect.