Good afternoon, ladies and gentlemen. Welcome to Besi's Quarterly Conference Call and Audio Webcast to discuss the company's 2022 third quarter results. You can log into the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer, and Mr. Andrea Kopp-Battaglia, Senior Vice President of Finance. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. The instruction will follow at that time. As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company. I would now like to turn the call over to Mr. Richard Blickman. Thank you.
Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then take your questions. I would like to remind you that some of the comments made during this call, and some of the answers in response to your questions by management, may contain forward-looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM. For today's call, we'd like to review the key highlights for our third quarter and nine months ended September 30, and also update you on the market, our strategy, and the outlook. First, some overall thoughts on the third quarter. Besi reported Q3 2022 results, which were at the favorable end of guidance but reflected the impact of a new industry downturn.
For the quarter, revenue, orders, and net income of EUR 168.8 million, EUR 125.3 million, and EUR 57.3 million decreased by 21.1%, 18.2%, and 24.2% respectively versus the second quarter of this year. At first, revenue and order developments this quarter reflected typical seasonal weakness for mobile applications, but also more general weakness in high-end server, data center, and general computing applications. Such weakness was partially offset by continued strength in automotive and industrial end user markets and ongoing shipments of hybrid bonding equipment to customers. Similarly, Besi's backlog of EUR 240.6 million at the end of Q3 declined by 12.6% versus Q2 2022, but remained at higher than typical levels.
Despite a challenging market environment, we maintained profit efficiency at higher levels with gross margins of 62.3%, exceeding guidance and a net margin of 34%. We realigned Besi's production model rapidly in response to changing market conditions. As a result, total headcount has declined by 12.7% and temporary Asian production headcount by 65.2% since the end of the first quarter of this year. We will continue to adjust overhead levels as necessary in accordance with market developments. For the first nine months, Besi reported revenue of EUR 585.1 million, which increased by 1.3%, and net income, which decreased by 6.9% versus the comparable period of last year, 2021. Growth was favorably influenced by increased demand for Besi's computing, automotive, and hybrid bonding end user markets.
Such strength was partially offset by reduced demand for high-end smartphones following a large capacity build in 2021. It also reflected a 37.6% revenue decrease from Chinese customers, primarily associated with overcapacity, slower economic growth, and COVID-19 related lockdowns. Orders of EUR 483.3 million decreased by 34.4% as industry conditions materially weakened post a significant assembly capacity build over the past two years. That EUR 14.8 million decrease in Besi's net income between the comparable periods principally resulted from a 49% increase in development spending as we increased investment in future areas of growth for the next market upcycle. Our liquidity position continues to build with strong cash flow generation of EUR 185.2 million during the first nine months of this year, which supports Besi's capital allocation policy.
We ended the quarter with cash and net deposits of EUR 661.8 million and a net cash of EUR 342.5 million. That represented increases of 12.1% and 19% respectively versus September 30 last year. Liquidity has improved this year despite the distribution of EUR 351.3 million to shareholders in the form of dividends and share repurchases. We completed our prior EUR 185 million share repurchase program in July and began purchases on our new EUR 300 million program in August. During the quarter, we repurchased a total of 0.9 million shares for an aggregate amount of EUR 45.5 million. Next, I'd like to speak a little bit about the current market environment and our strategy.
As seen in the next chart, an industry downturn began in the second quarter after a long capacity upcycle. Industry conditions deteriorated significantly during the third quarter, highlighted by slowing memory, mainstream computing, and data center markets, continued weakness in Chinese markets and CapEx reductions announced by many of the largest semiconductor producers. The only market which has enjoyed positive growth this year is automotive. The outlook for the assembly equipment market also turned more negative this quarter as industry conditions weakened, global GDP growth rates decelerated, and customer caution increased. At present, it appears to be a traditional industry downturn marked by overcapacity and order pushouts by customers. Down cycles are typically the periods in which Besi looks to improve its business model and plans investments in those products and technologies which will drive revenue growth in the next upcycle.
The announcement of new restrictions recently by the U.S. on sales of front-end and assembly equipment to China has added more uncertainty to the industry outlook. We are currently reviewing the imposed language to better understand whether any of Besi's below 10 micron accuracy systems could be subject to such provisions. Strategically, we are accelerating investment in Besi's future despite near-term headwinds, particularly for our hybrid bonding and wafer-level assembly portfolio. As the long-term drivers of our business remain intact and sub-10 nanometer device innovation continues apace. In fact, R&D spending has increased almost 50% this year, highlighting our enthusiasm for Besi's future growth opportunities. We see continued interest in hybrid bonding applications as the natural extension of Moore's Law to drive technology gains in new heterogeneous 3D architectures for next-generation logic, memory, mobile, automotive, and data center applications.
Of note, AMD announced last year in the third quarter, its first hybrid bonding chiplet, which was the starting point for the further adoption of hybrid bonding in the past 12 months. Besi received orders subsequent to quarter end for this incremental hybrid bonding capacity and for systems incorporated in hybrid bonding integrated lines. Additional orders are anticipated in the fourth quarter. Now a few words about Q4 guidance. For the fourth quarter, we estimate that revenue will decrease between 15% and 25% versus the third quarter, reflecting current market conditions and seasonal trends. However, Besi's gross margin is expected to remain in the 60%-62% range due to the flexibility of our production model and anticipated product mix. Further operating expenses are anticipated to increase by approximately 5% versus the third quarter, principally due to higher R&D spending.
The midpoint of Q4 guidance implies full-year revenue of approximately EUR 720 million, down approximately 4% versus 2021, and a gross margin of approximately 61%, up 1.4%. That ends my prepared remarks. I would like to open the call for some questions. Operator.
If you'd like to ask a question on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. The first question comes from the line of Didier Scemama of Bank of America. Please go ahead.
Oh, thank you very much. Good afternoon, everyone. Richard, I've got first a question on hybrid bonding. Could you give us a sense of how many orders you booked in Q3 and how many orders could come in Q4? In general, just give us a sense of where we are in terms of, you know, TSMC making progress on yields, on the alignment and the cluster tool. Just the general enthusiasm from your customers on hybrid bonding, and I've got a follow-up. Thank you.
Well, excellent. Quarter after quarter, we continue to see increased adoption in the industry more broadly. Of course, the cart is drawn by Taiwan in that manner. Also in the U.S., it's gaining traction. We have in a year's time shipped over 20 machines, of which the major part is in full production. The adoption rate of architecture using hybrid bonding and also the first chiplets are developing according to a roadmap which we understood about three years ago is simply intact. Taiwan being the first mover, the U.S. Following thereafter in the first stage, standalone equipment, and then also the cluster tool, the integrated line, simply following a concept whereby ultra-clean processing will be ever more critical when we move further down the design geometry roadmaps.
We are now in the 150-200 nanometer accuracy range, which will move down early next year as a start with 100 nanometers accuracy requirement. This supposedly is following the design rules for front-end from 7 nanometers today down to 5, and then 3 - 5 years down the road, we have to move down to 50 nanometers. This whole roadmap technology, but also adoption, as said earlier, follows a roadmap timeline, which is simply to expectation. Some can also claim that it is accelerating, but if you follow closely our guidance over time, also the analyst day presentations, June last year, June this year, the best way to summarize it is that it's on track.
How many machines in total will be required in certain time frames, we have simply interpreted the demand by the end customers indicated. It should come close to 50 machines in a first round. More orders are to be expected, as we mentioned in Q4, which have been indicated. Then we have next year, the start in the initial phase in the U.S., preparing for production volume in 2024. That may also, let's say, account for about 50 machines, simply based on numbers of devices produced. The major ramp is more and more, let's say, guided for 2024, 2025. There are some numbers indicated in Taiwan, for instance, but also in conferences, where the full adoption of hybrid bonding, especially the chiplet architecture by that time, will require significant more machines.
Besi is preparing for that in several ways. Number one, our R&D, which we also mentioned in this call, which is increased simply by the ever-increasing applications of using hybrid bonding technology. At the same time, our infrastructure, our supply chain to build those machines. We are gaining every day experience in supporting machines operating in full production environment. Step by step, say day by day, we are gaining experience and the adoption is continuing as expected.
Very interesting. Very useful actually, Richard. On the order intake, if you look at the shorter term environment, on the order intake for Q4, normal seasonality obviously is down. Would you say that the normal seasonality for Q1, which is no major order intake, would be reasonable given, you know, what we missed effectively last year, that a big customer that did not place orders, given that perhaps you've reached perhaps sort of a bottom of orders in Q4, and also taking into account what you just mentioned on the, let's say the new orders that may come in for hybrid bonding, is that the right way to think about it?
Well, we all know that in current times there are more uncertainties than just mentioning China, for instance.
Mm-hmm.
We are faced globally with significant inflation that could dampen the demand for semiconductors in many ways. The caveat seasonally, there's of course always the first half of the year is stronger than the second half. That has been, let's say, a rule of thumb for many years. You should then see orders come in Q4, Q1, simply organizing the demand, and then the delivery into Q2, Q3. Those are the typical patterns. How this year and the beginning of next year will evolve, the only thing I can say so far, in October, things continued positively. We also said the downturn started, let's say, Q1, Q2, so we are three, four quarters into the downturn.
Typically it lasts six quarters to eight quarters, depending upon outside factors. The summary is a bit, the message to convey is a bit more uncertain than it was, for instance, at the end of 2019 and then early 2020, but then all of a sudden COVID hit the world. For us, what's important is also order levels. If you simply imagine EUR 200 million Q4 last year, Q1, then dropping down to EUR 154 million, now to EUR 125 million. Revenue we guided down 15%-25% versus what we achieved in Q3, so that would mean somewhere 140 or 135 or whatever. But those are still very much higher levels than what we had in the previous cycle.
With the strong margins, supported of course a bit by a strong U.S. dollar. That bodes well in the semiconductor typical downturn. With the positive traction of new technology. That's a bit longer answer, Didier, how we look upon what may unfold in the next two quarters. Needless to say that we are ready to ramp rapidly in case that demand is required. Also, as we mentioned, if the world turns further south, we have many ways to adjust our model to more difficult times.
Very useful. Maybe one final question for me. You did mention on your press release this morning that some of your tools might be subject to the export controls. Apparently, the rules apply to tools that have 10-micron accuracy and below, which is a you know large portion of your shipments, and China obviously is an important geography for you. So can you perhaps give us a sense of how much of your revenues would be at risk, at least, as per your understanding of those rules? Thank you.
Well, as we currently understand that's less than 5%.
Thank you.
It's a very simple answer. The traction for the below 14 nanometers is for us certainly not out of China. That risk is limited. The only thing which, from our point of view, we'd like to share. It definitely will have an impact on the entire state of the industry. One could argue there will be production moving out of China to surrounding countries, maybe also onshoring in certain cases. That also is a positive thing because more equipment will be needed. Overall, it may have an impact of slower growth for the industry. The verdict is out. It's always exciting. We've gone through many of these situations in the world.
If we go back to Japan in the late eighties, the start of Korea, early nineties, all the other crises, the internet bubble, the banking crisis. The key is to understand these are always unique opportunities to build a better company.
The next question-
Yeah.
Apologies. The next question comes from the line of François-Xavier Bouvignies of UBS. Please go ahead.
Hi. Thank you very much. I have two quick questions, mainly follow-up to Didier's questions. On the hybrid bonding, I'm not sure I followed your comment, Richard. I'm sorry, but how many shipments do you expect for 2023? I mean, I heard like 50, but you were talking about, you know, a U.S. customer only. I'm just trying to better understand your answer. Like, you know, how many shipments do you expect for 2023 hybrid bonding? And how many orders do you have today total in your backlog? Just to clarify this, my first question, if it's possible.
Well, let's say the 50, as I mentioned, is an initial capacity indicated to offer this technology in mainstream production for high-end computing. That's the start, high-end logic devices and connected with that, certain chip. Then a wildcard is of course the application in high-end smartphones, and that could lead to significantly more capacity required. The 50 as a number is what is required, both in Taiwan and also in the U.S. What the number precisely will be in the end is difficult to forecast because they're not precise numbers. It depends, first of all, on the continued adoption of hybrid bonding as the next mainstream technology. Number two, as I mentioned, on which applications it will be used.
2023 is still a year of early adoption. The big volumes are expected in 2024, 2025, and 2026. Taiwan was very explicit about the demand they would expect in 2026, which then is an enormous tenfold increase over the initial phase. That's many machines, but that's also still a few years away. How much we have precisely today in backlog, we don't disclose. We don't do that for other machines. As I mentioned, so far, we've installed not only Taiwan but also in other places, close to 30 machines already this year. It's moving in that direction.
That's very clear. Thank you. Clarifies it actually. The second question is, again, it's follow-up on Didier. It's on the China restrictions. Direct impact from what I understand is less than 5%. What about the indirect impact? I mean, for example, you know, let's say YMTC is not able, I mean, it's not like maybe a lot of below 10 micron or if, you know, some Chinese can't operate because of these restrictions. Did you try to quantify, you know, how much it can impact your revenues in total, so direct and indirect as such? I know it's very challenging, but, you know, I thought I would try.
Well, it's a very good question. That's why I made the remark that it's too early to tell precisely because only tomorrow or the day after, I don't know which day precisely these new restrictions will be coming into effect. As I also mentioned, the effect of those restrictions on the industry is hard to tell. If we look back in historical perspective, and I mentioned in the past 30 years, other moments in time, that always has had a negative impact on the industry as a whole. The direct impact, less than 5%, that's very small.
What would happen to the entire industry, we hope of course that it is similar to a COVID impact, where first the initial thought was it would be very negative for the industry, but immediately it turned into many opportunities in growth in other areas. I also mentioned that you see, for instance, the slowdown in orders from Chinese subcontractors is not only because of Chinese economy and COVID, but that also has to do with capacities which are being organized elsewhere. We have mentioned this in previous calls, but this is, of course, accelerating with the measures which are becoming more and more restrictive in terms of growth in China, and that will have a positive impact outside of China.
That's very clear. Thank you very much.
The next question comes from Robert Sanders of Deutsche Bank. Please go ahead.
Yeah. Hi, good afternoon. I have a question on the smartphone application processor opportunity for hybrid bonding. My question is basically, TSMC is obviously developing a lot of capability in this area, and I suspect they're working with a lead customer, like for example, Apple. But you know, is the kind of expertise and intellectual property mainly with TSMC as opposed to with Apple? Because obviously, from a basic point of view, you want as many smartphone application processors to use this technology. Is there any kind of barrier from, you know, MediaTek or other companies using hybrid bonding quickly, or is there some kind of learning that they need to do before they ramp, you know, in 2024 or later? Thanks.
That's a very interesting question we are also discussing among ourselves, and it's hard to tell whether there will be any restrictions in terms of IP ownership. So far, we have not come across that yet. It could well be. You don't know who owns that. Is that a TSMC, or is that the high-end smartphone manufacturer, the designer? Well, there's some literature in the past month about that, which tends to point that towards the high-end smartphone, let's say, leader in the world, huh. How that will, in the end, restrict that adoption to others? Probably it will be licensed. That could also be a solution which has been done in the past and is still done in many instances.
Okay. As things stand, the TSMC 10 nm initial phase, it sounds like the huge majority of that capacity expansion is for smartphone application processor. Is that right? Or I mean, in a broad brush-
Yes
...more than three-quarters. Okay. Thank you. Well, that's it for my questions. Thanks.
Thanks.
The next question comes from Ruben Devos of Kepler Cheuvreux. Please go ahead.
Yes, good afternoon. I just had a question on the front-end. Basically, we've been seeing some conflicting updates lately in the industry. In particular, it looks so far that the front-end equipment suppliers are somewhat less impacted by a deteriorating macro environment, whereas the back end, such as yourself, is more feeling the pinch, let's say. I was curious whether you could help us understand what could potentially explain this difference and why this time it may or may not be different from a previous down cycle.
Well, we said in the previous call, and thanks for this question. This is a very positive, let's say, phenomenon. If you would have a significant front-end downturn, you would probably have also a longer back end, let's say, capacity adjustment. What typically happens is, and you can see that, statistically over many, many years. Back end is simply more shorter time adjustable in terms of capacity than front end. Front-end fabs take much longer time to build, to qualify, et cetera. The roadmap for the next three years for front end remains significantly strong simply because of underlying technology changes in our society and in the whole world. Back end clearly follows more closely capacity and also new technologies.
As we try to explain, there is, in certain areas, simply because of enormous growth in 2021, an overcapacity which will be absorbed, and you have new technologies which are continuing adoption and simply following the roadmaps for a next-generation technology and all the derivatives from that. We have been trying to share since February already that we have seen a peak in after eight quarters of growth, end of 2021, and we've seen gradually, Q1 was still very strong, but Q2 clearly evidenced by orders and Q3 even more, that we are following a typical downturn pattern for demand of assembly equipment.
All right. That's very helpful. Maybe to follow up on the R&D spend, I think the press release, we've also seen that these were somewhat higher this quarter and also for next quarter will be higher. Obviously a lot of innovation and progress and chip performance will now come from advanced packaging. I think if you look at consensus overall for the next few years, it looks like they expect it to trend down R&D spend relative to sales towards 6%. I believe peers are averaging about 10% of sales. My question is that a valid assumption that the market is taking, or how do you think about your R&D spend now that advanced packaging is gaining more attention in the semiconductor space?
Well, two comments. Number one. This has been, let's say, a characteristic for many years. Our R&D spend is very focused on customers. It's all driven by our clear customer programs. So very focused, which is also the key to our business strategy. Over time, that translates into relatively lower percentage of sales compared to comparable competitors. On the other hand, it has doubled, like our revenue in the past five years. We have simply told the world also in the Analyst Day that will continue to increase. Simply moving the accuracy down from 150 to 100 nanometers to 100 and then down to 50. Also the development roadmaps for all of our other 18 different platforms. It becomes ever more complicated.
Accuracies, more complicated devices, thinner packages, and that's an ongoing development, effort, which is wonderful. If you do that focused, on average, it should remain below 10%. Maybe in downturns it can be sometimes above 10%. That is simply sharing our philosophy. It's not driven by percentage of revenue, but it's very clearly driven by customer programs. The engagements with Taiwan, with the U.S., with Korea, those customers demand an enormous R&D engagement. The consequence of that is to continue to be selective in what we do and what we do not do. What we do, clearly mainstream-focused, to be a bit more precise on that, and not to be, let's say, diverted into unique, special solutions. It's all mainstream. Mainstream and product application-driven.
All right. Thank you very much, Richard.
The next question comes from Marc Hesselink of ING. Please go ahead.
Yes. Thank you. My first question is again on hybrid bonding. Looking at what you shared at the Capital Markets Day, saying that now that the machines are in the field, that you expected a quite rapid improvement in the performance from 1,000 units per hour to 2,000 before the year-end. How do you see that? Is that the trend? Is that technology progression going as planned? Also related to that, where do you currently see the competition?
That's also good. Well, as I tried to explain earlier, we're making significant progress every single day. That's also why we receive repeat orders. The exact number depends also on the device size. There are certain devices where we do reach the 1,500 and also where we are also already at 2,000. But that's not the key criterion at this moment. The key criterion is yield. Yield at those throughputs and reaching levels above 80%. To get there is a long journey. We started with this around seven years ago. We're getting better at it continuously.
About competition, we mentioned also earlier, competition, clearly Japanese was at the very beginning, a company which has also a wonderful system, but not with the throughput we've been told what we can accomplish. With the adoption increase, also others are telling the world they want to enter into the hybrid bonding technology space. Some have announced that next year they will introduce a hybrid bonder in a similar accuracy level, which we can achieve today, as prototypes. That only confirms that hybrid bonding is becoming a major mainstream technology for the years to come. There is definitely activity on the competition. I should also mention Korea, which typically wants to have also some independence.
Compared to a year ago, when there was still doubt on whether hybrid bonding would establish as a mainstream connection technology, that doubt is gone one year later. That also then convinces others to focus on the opportunities in this emerging market.
Okay, clear. I believe already that it's not gonna stop at the current productivity, it can continue. What does then eventually will do for your ASPs? Is it logically that you trend up with the improved performance?
Well, it trends up with higher complexity and with more throughput, cost of ownership. You always, in this industry forever, the measure is cost of ownership. Because in a simple way, the customer needs to produce an X number of devices, and the key is how many CapEx does he need to achieve that. In other words, how many bonders does he need to get that for you? That is how you sell the, yeah, the value of any product. If we look at this, hybrid universe, clearly, yeah, the 150 is already a major achievement compared to the one micron, well, even three micron, which is for flip chip. In the current mainstream, that's a major step and a much more expensive machine.
Going down that curve to 100 will increase only the cost already, and even more so going down to 50 nanometers. The trend will be a higher ASP in any case because of complexity. When we manage to continue to increase the output of these platforms over time, offering a better cost of ownership, that also can increase the price of these machines.
Yeah. The final question I had was, so the clients pick either like a standalone machine or a clustered integrated machine in an integrated cluster. What is the trade-off that they have to make, and why do they pick one and the other? Is there also differences in what kind of applications you're going to use it for?
Well, in the most simple way to look at this, the biggest enemy of a hybrid bonder, because it's copper to copper, it has to be ultra clean, no particles. Any particle will simply cause that the bond will not be established. Ultra clean is the name of the game. If you move any part from one machine to the next, you run the risk that you, in whatever way, create particles. To integrate these processes in one tool, and that's the whole concept, then by definition, you can reach the highest level of cleanliness, so zero particles. It's not as easy as it sounds because connecting these machines into a tool is already a major step, and we've come since the early beginning, early last year.
The first machines are, one is being shipped to Taiwan, the other in the U.S., and that will be a development program for at least another 12 months. Ultimately, the vision is that the industry will use this technology in a clustered format. Standalone is the way to get there, because then you can optimize every individual process, optimize the technology moving into smaller geometries. We expect side by side for the next many years that you will see this development. You see on the one hand standalone tools, and then for more mainstream adopted cluster tool solutions.
Okay. Very clear. Thanks.
The next question comes from Martin Marandon-Carlhian of Oddo BHF. Please go ahead.
Hi. Thank you for taking my question. My first question is on hybrid bonding. Considering the profit warning that we saw recently from CPU players and the slowdown on the server and in the PC market, does that change in any way the ramp-up of hybrid bonding in the short term? Meaning maybe a bit more back-end loaded than we expected. I have a follow-up.
Well, how this typically, let's say, is established in this world. Today's volume mainstream is based on technology of the last 3-5 years, because that is how it develops. The hybrid bonding is for the next technology, and today in a very early and in some customers still in infancy phase. It does not impact the technology progress. This has more an impact on today's tools used in those applications. We see that, as we mentioned, the slowdown in the press release, but also in the comments, there is, yeah, a certain saturation or you can say an overcapacity, and that has to be absorbed and new technology will be, yeah, leading the way to a next generation.
Okay. Very clear. Thank you. Maybe a question on overcapacity since you mentioned it. On the risk of overcapacity lasting longer than expected, you are already experiencing some inventory digestion at the moment as the market is slowing down, but how do you assess the risk of overcapacity in the industry with all the fabs which will come live in 2024, 2025, and the CapEx plans program ongoing, driven notably by sovereignty issues?
Well, to give you a very direct answer, this is a recipe for overcapacity by definition, and I hope that in investor calls in 2024, 2025, this will be a moderate overcapacity. We have seen this in the past. In the late 1980s, when Japan became too strong, there was a similar slowdown forced onto Japan. Korea started with massive support of the whole world and U.S. in particular, which led to an overcapacity in the second half of the 1990s with the Korea crisis. By definition, any factory is a capacity and is based on a model, which is always an overcapacity. How much that will be also depends on what's happening in further digitalization, in artificial intelligence.
If you look at all the business models, which should change society for the better, which requires an enormous growing amount of semiconductors in the next generation technology, there are many who forecast that will be another period of enormous expansion.
Yeah. Thank you. Thank you very much for that too.
Any-
The next question-
Oh.
Yeah.
Yeah. Please.
Comes from Charles Shi of Needham & Company. Please go ahead.
Hi. Good evening, Richard. Thank you for giving me a chance to ask a couple questions. Richard, I think how your business has been trending this year in 2022 almost exactly follow the same script for 2018. Meaning, like in Q3, you get a big decline, and in Q4 your decline kind of narrows. If the same trend follows, looks like in Q1, you may down a little bit in terms of your quarterly revenue, but it seems like that's when you could reach a bottom in terms of the quarterly revenue, then there's probably gonna recover from there. I wanna ask you about how you think about 2023 in terms of the year-on-year decline. Looks like, if the same.
You're following the same script into 2023, your revenue may decline by double-digit next year. In 2019, you were down like 30% something, on the top line. My question is, as you look at the industry cycle, this new down cycle into next year, how should we think about are you gonna fare better or fare worse than 2019? Or, what would be the reasons for you doing better or doing worse next year compared to 2019, relatively speaking, in terms of year-over-year growth? I hope my question is clear.
Crystal clear. Let's say the better 2023 compared to 2019 depends on the further adoption of hybrid bonding, what we discussed earlier in this call on. We had zero hybrid bonding in 2019. Number two is the next smartphone cycle with, let's say, major new elements, features. Those two will impact in a positive sense at 2023, because in 2019 we did not have a smartphone cycle. We had the iPhone X in 2017, which then was overexcited in 2018, which caused the enormous correction for us then. That is different this time because 2022 is not an iPhone or let's say high-end smartphone year in that sense. That's different. The key is of course, but all of us don't know, if you look at the economic environment, we had no interest rate at that time.
We had no inflation, we had no Ukraine war, we had some debates with China, but not to the extent we have right now. As I tried to explain earlier, we have also major risks, but also opportunities. That's, Charles, how we see the world.
Got it.
I could also add to that.
Yeah.
Also add to that, because that's also important. We have a much broader customer base compared to 2019. We already see that in the order levels. We have better margins. Our cost structure has improved significantly. There are many positive things for 2023.
Got it. Thanks. Maybe the next question, I think, Richard, you mentioned about in the downturn, what you wanna do. Well, one is developing new products, technology. I mean, that's a given. The other thing you mentioned, but I don't think you elaborated much, is this business model improvement. What exactly do you mean with that? But can you tell us what are the, I mean, specific actions you're trying to do or you maybe have been doing, in the down cycle? How should we think about that's gonna impact the next upcycle to your business? Thank you.
Well, that's also an excellent point. COVID has forced us to be much more directly engaged in our supply chain, simply because there were major issues every single day, but also because of that, we had to further expand our supplier base. Qualify different suppliers, different components. The focus on our supply chain has increased significantly. That, we already see some impact of that in a positive sense in this quarter, but also in 2022. Our operating model, which is very much using a multiple supplier strategy, that has further expanded, so we have a tighter grip on the supply chain. That creates cost improvements on ongoing basis, but also flexibility. Those are key targets. We simply repeat each time, we're far from perfect.
The way we build machines is, yeah, let's say compared to other industries which are far more tight, like the automotive industry. We also engage with people who are experts in those industries to teach us how we can better manage our total operating model. We use downturns typically to improve our operating model in every sense. That's a never-ending challenge in a similar way to product development.
Got it. Maybe allow me to squeeze in my final question on Q4. So Richard, I think last year in Q4 2021, I mean, you did get some initial orders from high-end smartphone applications, and do you see something similar this time? That's one. The other is the OpEx increase in Q4. I know you have started amortizing your capitalized R&D for hybrid bonding as you are recognizing revenue shipping new tools. How much of that 5% OpEx increase is really coming from increased amortization of the hybrid bonding R&D that has been capitalized in the past? Or how much of that is actually new incremental organic R&D development activities? Thank you.
About 50/50.
Okay. Sorry, what about the other question, about high-end smartphone?
Okay. Well, that's if we would know, we would be able to guide that. That will be very, very critical to understand. By the end of February, we will all know much more how this first half 2023 will develop and whether there will be a real cycle in that sense, supporting growth in 2023. We did mention already we had some long lead item orders in Q2 already for next year to be safe on a ramp potentially. As always, there are no guarantees.
All right. Thank you.
Any-
Sorry, carry on.
Any further questions? Sorry to interrupt.
We have two more questions. The next question comes from Timm Schulze-Melander of Redburn. Please go ahead.
Hi there. Richard, thank you for taking the question. I just had three very quick ones, if I may. First, just on hybrid bonding, just wanted to check some of my math. Year-to-date, a high double-digit euro contribution to revenues. Is that the right kind of ballpark?
Yes.
Perfect. In the non-hybrid bonding part of the business, could you just maybe talk a little bit about pricing discussions and pricing dynamics given the changing backdrop, and then I had a follow-up. Thank you.
Well, in response to an earlier question, the key in selling this type of equipment is a constant improvement of cost of ownership to customers. That simply means that there's pricing pressure is always in any business engagement. There's always a discussion about price. In offering improved cost of ownership versus previous generations, versus competitive choices, results, as you can see in margins which are at current levels. It also makes no sense in softer periods to try to sell more machines at a lower price because that's not the differentiator.
Right.
Certainly at the end where we sell our equipment, that's definitely not the place where we want to be. In general, because of inflation, we have a hard challenge, which is a very good one, by the way, to convince our customers that costs have gone up. We've done that this year twice already, last year because of all kinds of logistics costs and COVID-related costs. On the one hand, we are able to increase our prices once we can explain the reasoning. But that's the situation where I think capital goods industry is always in.
Right. That's helpful. Thank you. Just on the roadmap. You've talked about accuracy. I think we've sort of touched on just very briefly throughput. Could you just share what commitments you've made to your customers about throughput, about accuracy improvement? You've mentioned sort of 50 nanometer and 100 nanometers. Just maybe whether any of that is contractual, are there any damages or penalties other than obviously, you know, missed sales for missing that roadmap? That would be my last question. Thank you.
It's missing roadmaps. It's fair to say that with all these programs over many years, there are always setbacks. Setbacks because of ourselves not being able to get that right immediately. There are also other impacts, and we are in this whole production process, we are a certain element, so there's an impact pre our involvement and there are impacts in materials. So this is complicated environment which is dependent on many factors. It's not what you mentioned as the first. It's not contractual with dates which are cut off and penalties. These are development roadmap programs, where everyone is aware that there are definitely areas still to be proven. It's the design of concept. Many, let's say, unforeseen in a way, unexpected.
That's our world, and that's what we like. There are many customers who are excellent in setting the pressure to accomplish what we need to accomplish in the shortest period of time with every help because.
Right.
It's of their interest.
Very clear. Thank you.
The last question comes from the line of Riccardo Romiati of One Investments. Please go ahead.
Hi. Actually, it's Peter Tasker calling. I had two questions, please. One was just if you could help us on the ecosystem around you with hybrid bonding and just talk a bit about maybe the progress being made, in particular test and inspect metrology to keep up with your roadmap as you're bringing down the geometry, you know, where they are versus you, how you would expect that based upon what you understand has developed in the immediate next period. I have one other question.
Well, that's a very important question. Ever smaller geometries, and then also 3Ds, and stack devices where you can't look inside whether every bond is correct. Metrology is one of the critical factors in making this next step in this industry. On the other hand, we are talking about 150, 200 nanometers and then going down. Don't forget, in the front end, they're talking about 7, 5, 3 nanometers. The inspection methods are clearly also under development in many years' progress. Testing the same way. How do you test these devices? A functional test, but that's all in, let's say the development of an end product.
Okay. Would you say that the test and inspect and the metrology is keeping up with you at this stage, or is there, or will they shortly be keeping up with you?
Well, I think it's fair to say that we're all making that progress. Otherwise, the end customers couldn't make the commitment to using this technology.
Okay.
We always try, sir, to look at the end user and the end application. Where is this device used? That tells you how. The question earlier about high-end smartphones, you can imagine there's a lot of development, but is that already completely, let's say, established for mainstream application?
Thank you. The other question, please, was just if you could give a sense on the Chinese subcontractor utilization, what understanding you have as to where they've reached and the extent to which you may expect them to reengage at a normal pace in next coming quarters or no?
Well, there are two answers to that question. Number one is we see utilization rates carefully improving from what we mentioned in earlier calls, around the 50 and sometimes even somewhat lower, and that could lead to around early next year. On the other hand, as we mentioned, there's a clear trend of non-Chinese customers using Chinese subcontractors to move out of China. The question will be at what pace. What is very important is there has to become more clarity on what the restrictions, the latest restrictions of the U.S. imply, because that will determine, of course, also the infrastructure capacity expansion or not in China. That is today not really known. That's why we also, in our press release, simply made that comment that that is additional uncertainty but w e expect that to be clarified pretty soon because all of us are simply asking, "What does it mean?
Very good. Thank you for the answers.
Thank you.
There are no further questions. I will hand back to you, Mr. Blickman, for the closing remarks. Thank you.
Well, thank you all for your questions, and if there are any further, then please don't hesitate to contact us directly. Thank you. Bye-bye.
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