Melexis NV

XBRU:MELE

Earnings Call Analysis

Melexis Q3 2023 Financial Results Surge

Melexis sailed through the third quarter of 2023 with sales rising by 5% from the previous quarter, reflecting restored customer order patterns heading towards a typical order book. However, growth is anticipated to be modest in Q4 due to traditional year-end stock adjustments. The company's financial robustness is evidenced by a gross profit of €114.5 million, constituting 46.1% of sales—a 16% spike from the prior year—and net earnings increasing to €56.8 million, resulting in a hearty €1.41 per share. Looking ahead to the full year, Melexis projects about a 15% jump in sales, gross margins crossing the 45% threshold, and operating margins soaring above 27%, against the backdrop of a euro-U.S. dollar rate fixed at 1.05.

Steady Sales Growth with a Return to Normalcy

In the third quarter of 2023, the company reported a 5% increase in sales over the previous quarter, suggesting a return to more typical customer ordering patterns and a normalization of the order book.

Key Product Drivers

Motor drivers, magnetic sensors, and pressure sensors led the performance, largely due to advancements in electrification, comfort, and safety within the automotive industry. Moreover, product successes in temperature sensors were noted in the wearable tech and smartphone markets.

Innovation and New Launches

With continued innovation, the company has introduced new current sensors for EV battery management and ultra-low power all effect switches for the Internet of Things (IoT), industrial, and white goods applications, keeping the product pipeline fresh and competitive.

Financial Stability and Positive Outlook

The financials showed strength, with sales reaching €248.6 million, marking a 13% increase compared to the same period last year. Gross profit stood at 46.1% of sales, and net earnings per share increased by 16% year-over-year. With an expectation to end the year with a 15% increase in sales and maintain margins above 45% for gross profit and 27% for operating profit, prospects look favorable.

Supply-Demand Dynamics

A challenging balance between supply and demand persists, as certain products remain under allocation and stress. This is compounded by a lag effect due to long lead times from wafer order to delivery. Nonetheless, the company is shielded from some volatility through long-term agreements.

Market Position for TPMS

The company expressed a bullish stance on Tire Pressure Monitoring System (TPMS), citing product ramp-ups at various customers, despite a temporary growth plateau in Q3 attributed to supply constraints.

EV Growth and Geopolitical Challenges

Even though electric vehicle (EV) growth is experiencing a slowdown from initial projections, companies like Tesla aim to sustain demand through price reductions. These factors, along with geopolitical tensions, present headwinds, but the company's growth trajectory remains intact.

Strategic Response to Competition

Competition, particularly from China, is intensifying; however, the company stays ahead by innovating and avoiding price wars. By releasing 15 to 20 new products annually, it continues to bring value to the market and differentiate its offerings from basic commodity products.

Future Gross Margin Trends

Although current gross margin levels are strong due to inventory effects, there is an expectation that this will normalize to lower levels as the influence of inventory valuation fades.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the Melexis Q3 2023 Results Call. My name is Natalie, 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, Marc Biron to begin today's conference. Thank you.

[Marc Biron, executive]

Thank you. Dear audience, thank you for joining the Melexis Earnings Call regarding the third quarter of 2023.

As always, I will start with the business update, after which, our CFO, Karen Van Griensven, will comment on the financials. We will answer your questions afterwards.

Sales in the third quarter of '23 came out with an increase of 5% compared to the previous quarter. During the third quarter, we observed that the order behavior of customers is coming back to a more historical pattern, converging into a normalized order book.

For the last quarter of the year, we expect limited growth because of the usual end of year inventory adjustments.

The best-performing product during Q3 were our motor drivers, our magnetic sensor and our pressure sensor product, a trend clearly driven by electrification and the need for more comfort and more safety.

The embedded motor drivers benefit from the gradual decarbonization of the car because they contribute to extend the range of the car. They are extensively used in thermal management application in cabin and also in the powertrain.

The other outperforming products are used in application increasing the comfort and the safety level of the car. Our magnetic sensor can be found in e-steering and e-braking application, while the pressure sensor growth is driven by the tire pressure monitoring system, TPMS, and this TPMS is ramping up at different OEMs.

The size of the product, as well as its very low power consumption, are unique feature that explain the success of the TPMS.

The high safety level and the unique magnetic operation of the magnetic sensor are the main reason for the high demand of this magnetic sensor, especially in the e-braking system.

We also had a very important success in Q3 with our temperature sensor because of renewed business in smart watches and also new business in smartphone. The contactless temperature measurement and the very high accuracy of the device creates a lot of attractiveness for the Melexis temperature product family.

In the third quarter, we also launched in the market new products. For example, the new current sensors, which is a perfect fit for the EV battery management, and also for the power distribution system.

We have also launched 2 ultra-low power all effect switch, which are ideal for IOT, industrial and white goods applications.

Before I give the floor to Karen for the financials, I would like to remind our Capital Market Day on 14th of November. We will be happy to welcome you in Ieper in Belgium, where we will present our strategy, our long-term financial targets as well as the product and application that will fuel our growth in the future.

Thank you. Karen, I'll give you the floor.

[Karen Van Griensven, executive]

Thank you, Mark. So welcome, everybody. So as mentioned already, we came out with EUR 248.6 million in the third quarter. So 13% increase versus a year ago and 5% versus the previous quarter, with a 3% negative impact of the euro-U.S. dollar versus a year ago, and no impact of the dollar versus the previous quarter.

The gross result was EUR 114.5 million or 46.1% of sales, an increase of 16% compared to the same quarter of last year and an increase of 3% compared to the previous quarter.

R&D expenses were at 10.7% of sales, G&A was at 4.8% of sales, and selling was at 2% of sales.

The operating result was EUR 71.1 million or 28.6% of sales, which is an increase of 16% compared to the same quarter of last year, and an increase of 5% compared to the previous quarter.

The net result was EUR 56.8 million or EUR 1.41 per share, an increase of 16%, compared to EUR 48.8 million or EUR 1.21 per share in the third quarter of 2022, and an increase of 9% compared to the previous quarter.

If we look them ahead, so Melexis expects sales in the fourth quarter of 2023 in the range of EUR 247 million to EUR 251 million. So for the full year, Melexis expects sales to increase around 15%, a gross profit margin above 45%, and an operating margin above 27%, which was previously around 27%. And all of this taking into account a euro-U.S. dollar exchange rate of 1.05 for the remainder of the year.

So operator, I would like to now open the Q&A session. So please go ahead.

[Operator]

[Operator Instructions] Your first question goes to Marc Hesselink from ING.

[Marc Hesselink, analyst]

Yes. Maybe the first question is on supply and demand. You shared that number in the past, that value, that how much bigger the demand is versus supply. Can you maybe share that again? And also, how you expect supply to ramp up over the course of 2024?

And my second question is on pricing. We've seen -- most of your business is on long-term agreements, but maybe you've also seen some price pressure in the business that not on long-term agreements. So maybe, can you talk around that and how you see that maybe impacting long-term agreements over the more longer term?

[Marc Biron, executive]

Yes. On the first question about supply and demand, I think what we mentioned during the previous quarter is still valid. I think for a large part of the business, there is a better balance between supply and demand, but we still have some pockets of business or some pocket of products that are still under allocation or under stress.

Yes, I want also to mention perhaps that it -- given the lead time, which is, let's say, 9 months before -- between the order of the wafers and the delivery to customers. Yes, it's not because we don't have supply constraint at Melexis level, then the customer is not yet -- not in constraint anymore because there is this delay. I mean, we need time to move the product from the supply chain to the customer.

In terms of pricing, your second question. As you mentioned, indeed, yes, part of the business is protected by LTA, the long-term agreement that has been defined for '23, '24 and '25. And -- but it's also, as I mentioned, let's say, for the supply chain and also for the order behavior, which is coming back to normal. But there is also, let's say, kind of usual price discussion that is coming back also from part of the business. But I would say yes, we were well prepared in the past for such a discussion. And we are preparing the same way for the discussion of today, then I would say we are confident because we know how to deal it because we have dealt with this kind of discussion in the past.

[Marc Hesselink, analyst]

Maybe the second part of the first question, the supply increases for 2024?

[Marc Biron, executive]

Sorry, I forget it, yes. Yes, we have together with our suppliers, we are working to increase the supply. And I think, you have realized that the supply is increasing, let's say, quarter after quarter. And for the part of business, which is still under constraint, the supply will continue to increase gradually in 2024.

[Operator]

Your next question comes from Robert Sanders from Deutsche Bank.

[Robert Sanders, analyst]

You sound pretty bullish on your TPMS opportunity. Can you just talk a bit about what your market share goals are, where your share is today? And how your solution compares to the likes of Infineon, NXP, [ Schrader ], et cetera? And I have a follow-up.

[Marc Biron, executive]

Yes. I think you mentioned in your question the competitor, and I confirm those are the competitor. Yes, I would say it's not that we are really bullish in the answer. This is just the fact, let's say, we have some application ramping up at some customers. And this is the result of the ramping up.

It's -- I mean, we have the TPMS. It's the second generation of TPMS. And we have this product, let's say, available, this version since this 3, 4 years, and now it is ramping up at a different customer.

[Robert Sanders, analyst]

Got it. And in Ambient Lighting, you didn't mention that as being strong. Is there some digestion in Ambient Lighting? And are you still supply constrained in Ambient Lighting?

[Marc Biron, executive]

Yes. I think, indeed, we did not mention it because it did not grow a lot, let's say, in Q3 versus Q2, but it's supply constrained.

[Robert Sanders, analyst]

And are you losing share because you are supply constrained, and others are like Elmos or not? Or you don't recognize that statement?

[Marc Biron, executive]

Yes, we still have much more harder than what we can supply.

[Robert Sanders, analyst]

Okay. So when you say pockets of the business under stress, it's still quite a large part of your business that is still supply constrained?

[Marc Biron, executive]

I think -- no. From a percentage-wise, it's not a lot. But indeed, it's correct that the [indiscernible] in the Ambient Lighting is part of them, yes.

[Robert Sanders, analyst]

Got it. And just last question, just on the destocking. We've seen some other companies like eBlocks see quite major destocking because their lead times normalized. Have you seen the destocking effect or what you call normalization in the backlog, mainly in the products where lead times are kind of back to normal? Or is it just -- do you think customers have over ordered in the past and are now prepared to kind of normalize their inventory?

[Marc Biron, executive]

No, I think it's a bit -- it's a global across the different product portfolio.

Do you have another question? Just to make sure we are still online.

[Francois-Xavier Bouvignies, analyst]

Can you hear me?

[Marc Biron, executive]

Yes.

[Francois-Xavier Bouvignies, analyst]

Hello?

[Marc Biron, executive]

Yes, we hear you.

[Francois-Xavier Bouvignies, analyst]

Okay. I don't know. I didn't hear anybody calling for me, but I'm online. I was trying because of the quiet line. So it's Francois Bouvignies from UBS.

So I have 2 quick ones. So in your remarks, Marc, you talked about challenging geopolitical environment and softer electric, softer EV demand. You also talked about orders, normalization.

Now the question is, when you look at your numbers in terms of revenue growth, it's actually growing still mid-teens, I mean, this quarter and next quarter. So when you talk about the orders and softer EV demand, does it mean that we will see that at a later stage because it doesn't seem that we see anything right now? Your demand is still fairly strong. Your revenue is very strong. When you say that, is it already impacting your revenues?

So in other words, what you're seeing on the order behavior and EV demand, is it something that we should forecast to impact a bit at a later stage, let's say, 2024? Is it fair to see that way?

[Marc Biron, executive]

We will not comment about '24 because usually, we always give this comment.

[Francois-Xavier Bouvignies, analyst]

No. Yes, I'm not asking for quantification guidance. I'm just talking about the mechanical around it because if you said that there is 9 months lead times between your order and your shipments, if you see the orders changing right now, it wouldn't mean, based on what you said, that we will see the impact 9 months later. You see what I mean?

[Marc Biron, executive]

Yes. No, I think you could see it. The comment you could see them in the fact that, yes, we could have been, I think, better in Q3 and also in Q4 with all the headwind that you mentioned. I think there is, for sure, yes, some geopolitic challenge.

As I mentioned, and I think it's public that the EV growth -- is still growing a lot, but let's say, slower than anticipated. I think in the -- it's clear, for example, in Belgium that OD has postponed, let's say, the release of the EV production in Brussels. It's also clear that Tesla is reducing their price in order to keep the demand as high as possible. And I think all of this may create the fact that we could have had a better Q3 and a better Q4 with all those headwinds. But at the end, we are still growing.

[Francois-Xavier Bouvignies, analyst]

Okay. So you're already seeing that this quarter or next quarter. Can you quantify at all? Or I mean, any help around that? What would have been without this slowdown, the growth rate, for example?

[Marc Biron, executive]

No, it's difficult to say. It's difficult to say.

[Francois-Xavier Bouvignies, analyst]

Okay. The second question is on China. So we know China has been pushing hard on the semiconductor side of things in many different areas. One thing that is very difficult is on the magnetic sensor side. I mean, do you see any local Chinese competitors developing some solution?

And maybe if you can tell us your exposure to the Chinese local market, that would be great as well. Yes, that's kind of the China situation, local competition, if you see that ramping up and the size of local China, please?

[Marc Biron, executive]

Yes. But first, in general, there are indeed or there is indeed competition in China, but it's not only in China. I mean, we have competition everywhere. It's correct that the competition is a bit magnified in China, but it's not that we don't know how to deal with competition. We have competition in Europe. We have competition in the U.S. And also in China, and as you mentioned, I confirm that the competition in China is probably magnified.

But as usual, our answer to the competition is innovation. I mean we have -- we launch between 15 and 20 new products every year, which are always innovative products. And yes, the strategy of Melexis is to avoid, let's say, the price battle and focus on the innovation, which is also the case in China.

And to answer your initial question about competition. Yes, we see, I would say, more and more competitor in China also for magnetic. But those are, let's say, basic products and there are, thanks to our innovation, we can bring more value to the customers, also with our magnetic product. But it's correct that the simple products are under competition in China, but it's not our core business, let's say. Our strategy is to bring to link innovation.

[Francois-Xavier Bouvignies, analyst]

Very clear. And the size of local China as a percentage of revenues, can you help us quantify it?

[Marc Biron, executive]

Overall, for Melexis, it's 25%.

[Operator]

We'll take our next question from Janardan Menon at Jefferies.

[Janardan Menon, analyst]

My first question is on gross margins. Your gross margin has been running quite strong right now, and you've guided for more than 45%. But to get to the 45% to 46% range would imply a gross margin decline quarter-on-quarter.

So I'm just wondering, is your guidance conservative for the full year at 45% plus? Or I mean, what I'm saying is could you have guided even at this 45-plus mean also 46 plus? Or is there any specific gross margin headwind that we should expect into Q4? Or any reason for gross margins to decline into Q4?

[Karen Van Griensven, executive]

Well, in general, in this year, gross margin is certainly in the first quarter because of inventory effect is actually artificially high. So we know it will come down, short or midterm to more normalized levels. What it will be in Q4 is difficult to predict exactly. But the general trend will be that it will be down from the levels that we see today because of the inventory effect that will gradually fade out. So, yes.

[Janardan Menon, analyst]

Understood. And given that you referred to some inventory normalization correction, et cetera, would -- should we also expect any kind of effect from -- on the utilization at your testing facilities in the next 1 or 2 quarters?

[Karen Van Griensven, executive]

Well, the machine is running quite stable for the moment. I don't expect major impact from that for the time being.

[Janardan Menon, analyst]

Okay. And then just going on to your comment in your opening remarks, on you're seeing some normal end of the inventory adjustments into Q4. Is that more in the channel? Is that at your sort of direct customers? And what is the level of confidence that, that is only going to be a Q4 phenomenon? And it is truly just an end-of-year seasonal situation and it will not continue into the first half of next year?

[Marc Biron, executive]

Yes. It's what we see, those adjustments, and in the channel, and in our customer on our Tier 1. I would say, in the channel for the distributor, we see that the inventory is stable, even decreasing a bit. For our customers, we see that the inventory is growing and now stabilizing, but it has grown during the previous months and quarters. And we see indeed that they are adjusting their inventory towards the end of the year. And this is why we really see the effect on those 2 inventories.

[Janardan Menon, analyst]

Understood. And just last question for me. On the -- in the last couple of years, you've always said that you are deprioritizing adjacent markets because the demand from automotive is so strong that you can't fulfill automotive demand, and you are sort of giving higher priority to automotive.

Given that, that situation may be changing a little bit, which is automotive chips are coming out of shortage in most cases or in many cases, and you did get this pickup in adjacent markets in Q3. Can we expect that if the automotive side does weaken more than you expect, let's say, in the next 6 months or so, will you be able to cover that slack by shipping more into adjacent markets? Or what I'm trying to say, is adjacent demand strong enough based on your new design wins like the smartphone win, et cetera, to compensate for that weakness right now based on your current visibility?

[Marc Biron, executive]

It's difficult to answer because yes, we don't know -- the weakness that you mentioned, we don't know what is the level of the weakness. But it's correct that the capacity being increased and indeed some adjustment that we -- in the inventory, that we see. It's correct that then we can give more volume to the adjacent.

And for sure, it's a goal of Melexis to balance one with the other, that we have indeed -- we are working now indeed to move some capacity towards adjacent. And we see that, yes, in some application, the adjacent application. We see some traction of those applications.

You mentioned the temperature sensors, but we see it in also other domain.

[Operator]

We'll now move on to our next question from Ruben Devos at Kepler Cheuvreux.

[Ruben Devos, analyst]

I've got just 1 following up on the temperature sensor, which you just mentioned. I believe this will be included in the Pixel 8 Pro smartphones.

Could you talk a bit more about the prospect that this could potentially be included in other high-end smartphones as well in your view? And given the expected volumes of the Google Pixel smartphones, it appears like this could be somewhat of a meaningful contributor to your sales. Could you talk a bit about how material this could be for you?

[Marc Biron, executive]

Yes. The Google smartphone is -- I mean, it's not, let's say, the most popular smartphone and how much more popular smartphone. It's also on the high-end version of the phone. Then, yes, I think it's a good success for Melexis because we have proved to the market that we have a product which fits the smartphone requirement.

In terms of volume, it is not fantastic. I mean it's for sure, good volume. And for sure, we welcome those volumes, but it's -- I repeat, those are not as popular phone as other phone. But for us, it's really important that we have proved to the market that we can make it, and achieve this fully compatible with the expectation.

[Ruben Devos, analyst]

Okay. And then just more generally, I was wondering like, if you think about maybe the sales, new car sales these days of, let's say, 15% for petro-electric vehicles and 85% other. How would you think about your split in automotive with your share of sales?

[Marc Biron, executive]

It's difficult to answer because we have many products that are agnostic to the split between ICE and battery cars. We have let's say, 50% of the product is agnostic to this. And then the other 50% is indeed split between battery and ICE.

I don't know, Karen, if you know the split, but I don't know exactly how we could mention the split.

[Karen Van Griensven, executive]

Between the ICE and battery. Yes, well, the majority is indeed agnostic. And yes, we go more and more to an equal split in what is specific. And gradually EV has taken the overhand, so it's a gradual process. But it's the minority of our business that is -- so all in all, we are not very sensitive to the move -- to the speed of the move to EV or ICE in general.

[Marc Biron, executive]

Yes. I can add that from a design win perspective, it is clear that the very vast majority of the design win are for either the agnostic or the battery powertrain. But yes, there is very, very limited number of design wins for ICE because clearly, the OEM focused their development on the electric cars, and they don't develop a new application or almost no new application for the ICE.

[Ruben Devos, analyst]

Okay. And if I just can come back on the temperature sensor very quickly. You mentioned, it's not -- they don't really have high market share, Google within the overall smartphone market.

But do you see like -- do you see there's any possibility of you also making inroads into selling to other handset manufacturers? You've had this win. It's a niche feature so far. But do you see more opportunity here?

[Marc Biron, executive]

I think we are working on different opportunities in the smartphone, but also in other wearables. And we believe indeed that this temperature sensors can add value on those wearable. But for the time being, from the smartphone perspective, except for Google, I mean, I don't have anything to mention.

[Operator]

We'll move on to our next question from Guy Sips of KBC Securities.

[Guy Sips, analyst]

Can you update us on the situation in the Malaysian factory. So the -- is it still -- are you still working on a EUR 70 million investment, and that the new building is expected to be completed by the end of this year? Are you speeding it up and trying to get it finished earlier? What's the situation over there?

[Karen Van Griensven, executive]

We are still on plan. And that means that production will be ready by year-end. So we'll move early next year into the production facility.

The office building will be finalized in Q1. So that will be still part of the investment in -- for next year, but the majority will be done by the year-end, as was planned in the beginning of the year.

[Johannes Ries, analyst]

And it's still the EUR 70 million in the next 5 years that is expected?

[Karen Van Griensven, executive]

The overall investment, yes, that's in that range of which half is more or less the facility.

That's good news in general, I think, that we managed to have a speedy execution in Malaysia.

[Marc Biron, executive]

And in return, we'll get more capacity.

[Operator]

[Operator Instructions] There are no further questions, so I'll hand it back to Mr. Marc to complete this conference. Thank you.

[Marc Biron, executive]

Thank you. To close the conference, I would like to thank you for the questions. I'm looking forward to discuss again in February.

But before that, I would like to remind our Capital Market Day on 14th of November. And again, we'd be happy to welcome you in Ieper in Belgium, and to listen to our long-term strategy, long-term financial targets. Also, we'd like to present the product and the application that will grow our future. And of course, we could have -- take the opportunity, let's say, to discuss during the break or during the lunch on more informal way. Thank you.

[Operator]

This concludes this call. Thank you for your participation. You may now disconnect.