Earnings Call: Q2 2021

Jul 27, 2021

Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's 2021 second quarter and first half year 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 Ms. Hedwig van Kerkhof, Senior Vice President, Finance. At this moment, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions 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. Please go ahead, sir. 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 reports filed with the AFM. For today's call, we'd like to review the key highlights for our second quarter and six months ended June 30, and also update you on the market, our strategy, and the outlook. First, some overall thoughts on the second quarter. Besi reported strong results for the second quarter and the first half of this year as we successfully ramped production to meet increased customer demand in the current upturn, while controlling expense development. Revenue of EUR 226.1 million increased by 57.9% versus the first quarter of this year, and 81.9% versus the second quarter last year, due to broad-based growth across all key end user markets and geographies. We experienced particular strength in shipments for high-end mobile applications associated with the capacity built in Q1 of this year. Revenue was significantly above guidance due to higher than anticipated shipments from backlog as Besi managed supply chain issues and pandemic restrictions in various countries. As such, we were able to achieve an annualized run rate of approximately EUR 900 million this quarter, which brings us closer to our target of EUR 1 billion revenue objective. In addition, orders of €200.2 million almost doubled versus the second quarter last year, reflecting ongoing market strength as well as increased demand for high performance computing, cloud infrastructure, mainstream electronics, and automotive applications from both IDMs and Asian subcontractors. Included in the second quarter this year, bookings for orders for hybrid bonding systems from two major customers with follow-on orders anticipated in the third quarter of this year. Net income for the second quarter reached €93.5 million, an increase of €55.9 million, and €53.7 million versus Q1 of this year and Q2 of last year respectively. Similarly, net margins grew to 41.3%, an increase of 15 points versus Q1 this year, and 9.3 points versus the second quarter last year, reflecting the enhanced profit potential of Besi's business model. Strong profit growth was due primarily to significantly higher revenue levels, combined with gross margins that exceeded expectations and disciplined overhead management. Operating leverage was evident in a reduction of operating expense as a percentage of revenue from 24.4% and 23% in the first quarter of this year and the second quarter of last year respectively, to 14.9% in the second quarter of this year. Further upward gross margin development in the second quarter this year versus second quarter last year was limited by adverse Forex influences from a weaker dollar versus the euro and additional costs incurred to rapidly scale production capacity. Besi's first half results were also solid, with revenue reaching EUR 369.3 million, an increase of EUR 153.7 million or 71.3% versus the first half last year, and net income rising by 144.1% to reach EUR 131.1 million, which was approximately equal to net income for all of fiscal 2020. Our profitability has increased significantly since the last industry downturn relative to all major financial metrics. This was primarily due to the progress made by our existing advanced packaging portfolio, market share gains, and successful implementation of strategic revenue and cost control initiatives. In the chart presented, you can see that operating income grew by 63.3% versus the comparable period of the prior cycle. In addition, operating margins increased by 9.1 points to 42.3% when using the midpoint of the third quarter 2021 guidance. This was aided by a 6% reduction in fixed headcount between the second quarter 2017 and the second quarter of this year. The increased efficiency of Besi's business model positions us well for expanded profitability in the current and future industry cycles. Our liquidity position remained strong, with total cash and deposits at June 30 of EUR 511.4 million, which was up 39.5% versus June 30, 2020. Growth occurred despite a significant working capital investment necessary to finance our rapid revenue growth and increase capital allocation in the form of dividends and share repurchases. Net cash of EUR 206.7 million at quarter end increased by 120.8% versus June 30 last year, aided by the conversion in the first half of EUR 104.3 million of our 2.5% convertible notes 2016. At quarter end, only EUR 5.7 million principal amount remained outstanding. Given continued strong cash flow generation, we intend to increase our share repurchase program by EUR 60 million to a total of EUR 185 million, and to extend its duration until October 2022. I'd like to speak a little bit about the current market environment and our strategy. As seen in this next chart, the semiconductor equipment industry continues its strong upward growth trajectory. During the second quarter of this year, additional new fab investments were announced, particularly in the advanced packaging space. In addition, shortages continued for specific components in computing, automotive, and end-user markets, and many governments announced plans to encourage additional semiconductor investments. Given continued market strength, SI revised its 2021 assembly equipment forecast upwards to 42% growth from 31% in the first quarter of this year. In addition, they now anticipate the total market to grow by 67% between 2020 and 2023 to reach an aggregate of $6 billion, including incremental wafer-level assembly investments. At present, our strategic priorities focus on maintaining the health and safety of our employees in face of the new COVID-19 variants, meeting customer delivery schedules in a challenging production environment, expanding development efforts for Besi wafer-level activities, and joint development programs with Applied Materials, and allocating resources to support the development and growth of existing and next-generation product portfolios. A few words about our third quarter 2021 guidance. Looking forward, we believe that the market drivers supporting the growth of the assembly equipment market in this upcycle remain intact. For the third quarter, we estimate that revenue will decline by 5%-15% versus the second quarter, consistent with seasonal order trends inherent in our business. As you can see in this chart, the five-year average of Besi Q2, Q3 sequential revenue decrease was 12.7%. Our projected Q3 revenue development is slightly better than historical trends. In addition, we forecast gross margin in the third quarter to remain in the range between 60% and 62%, and for operating expenses to decrease by 5%-10% versus the EUR 33.6 million realized in the second quarter of this year. That ends my prepared remarks. I would like to open the call for questions, operator. Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. If you have a question or remark, please press star one on your telephone. Go ahead please, star one for questions or remarks. The first question is coming from Mr. Stéphane Houri from Oddo. Please go ahead. Your line is open now. Yes, good afternoon. Actually, I have two questions. The first one is on the visibility that you have on the current upcycle. If you can share with us what is the order activity you expect on Q3, and what are the current lead times for the tools on which you receive orders? That's the first question. The second question is on gross margin, because you were above the high end of your guidance on the gross margin for the quarter, and this is probably going to be repeated in Q3. I would like to understand what is this mix improvement that you are talking about, and is it sustainable going forward? Thank you. Thanks, Stéphane. First of all, visibility. As we indicated in the press release, but also in these comments, we always see a seasonal pattern. The strongest order intake is in the first half year. Same with revenue, because there are many products which are consumer products, and typically the new generations are introduced in the second half of a calendar year. Don't ask me why, but that is a pattern which we've seen for many years. The order intake so far this quarter looks very well. It continues. That's why we also made this comment. That's also via Lasair's message. The cycle is very much intact. Our visibility in assembly equipment is typically 3, 4 months is the window. Certainly, we have a very decent backlog also because of the high order intake in the first quarter, continued in the second quarter. The visibility the next quarter, that's what we typically see. There's more general, let's say, vision on how this cycle will develop. As mentioned, it could well continue, whether that's a straight line is always to be seen. It's also very common that in these cycles, and especially strong cycles, there are many people who predict that life will continue to grow forever. We still believe that this industry, because it's technology-driven by nature, it has a certain cyclicality. The current visibility is a very positive visibility. On your second question, gross margin. We mentioned end of April, a gross margin somewhere in the range 58%-60%. We came out at 62%. We guided revenue up 30%-40%, which was just short of EUR 200 million. We ended above EUR 200 million. It shows you several very important aspects. Number one, our operating model with the basic design that we have multiple sourcing for most of our modules and components has supported enormously the revenue growth which we have seen so far, with all the, let's say, roadblocks because of COVID developments, not only in our own facilities, but especially in our supply chains, also at customers. We've had issues at customers who could not receive equipment because of lockdowns. That's today's life, and we've been able to manage that pretty well. Also economies of scale, once you are able to organize the supply chains and those operations, that in the end results in gross margins which are at the better end of our own, let's say, estimations for a certain period. The mix, we mentioned that also was a favorable mix. We mentioned that to earlier questions. The margins range from, let's say, the low 50s to well above 60s, 70s even. It's a mix. We have 18 different platforms, and products in different applications. That mix is important. With guiding currently above 60%-62% means that it's a very positive mix. That's the comment on the gross margins. I hope that's helpful. Yes, it is. Thank you very much. The next question is coming from Mr. Marc Hesselink, ING. Please go ahead. Yes. Thank you. First question is on actually your ramp capacity. That went pretty quickly over the quarter. Can you maybe explain a little bit what you did, what's next to get to the next point of the 1 billion output? What do you still have to do there? Well, our main facility in Asia is in Malaysia, where we started already back in 1994. We started systems assembly around 2000. Since 2005/2006, that became the main center. China, we started a bit later, 2002. Systems assembly, 2014/2015. Ever since, year by year, and we have opted for a model whereby China is a satellite of Malaysia, and simply by chance, by luck, that has helped us tremendously in this COVID time. In the beginning, last year, 1st quarter, 2nd quarter, we had issues in China, and where we were able to shift certain systems assemblies which were anticipated and started in China to Malaysia. Now we have done that the other way around, because China is COVID free, where we are in Leshan, and Malaysia is facing increased COVID issues over the quarter. We have shifted manufacturing of systems from Malaysia to China. The reason why we were a bit careful is because the levels we achieve now in China are levels we have never achieved before. Needless to say, that it works very well. With this double capacity available and demonstrated ramping capabilities, we have the unique situation that from here we can increase further. We did similar with the supply chains. We started with building up supply chains from Europe and Asia, Southeast Asia mainly, Taiwan also, and then we also started to build up supply chains in China as of 2014. That has also been a godsend. In the current situation, our multiple supplier strategy has been of critical importance to survive these unpredictable COVID circumstances. That's a bit more background on how we were able to ramp to these unprecedented levels. Does that answer your question? Yes. It's clear. Second question I had is on, if you look at your clients, and we still hear the stories a lot, everybody fully booked, still a lot of shortages in chips. Do you see that also? I mean, in the first quarter, you had a very high order intake. Probably people that want to solve that chip supply issue. What kind of sentiment do you see now? Is there still the utilization at extremely high levels at your clients, and they want to get every machine that they can get? Yes. There are several factors. Number 1, and that's ever more visible, is that this COVID situation has accelerated the digital society developments. We all individually see that, but that is 1 of the big demand drivers. Number 2, for that further acceleration, you need a different infrastructure, accelerated 5G development. You also have far more data to be processed, and we see that as well. On top of that, the automotive has come back, and in a much stronger way, also with all the CO2 targets, electrical cars, hybrid cars. On all 3 engines, so high-end communication, computing data, and also automotive, there's a significant demand increase, basically since the beginning of the 4th quarter, November last year. The confidence that with vaccine rollouts, the world would become intact again, that is the big driver. You could ask the question, of course, is there a risk of double ordering? That risk is always the case in any industry. We've seen no signs of that yet. There are no, let's say, lead times which are ridiculously long. That's typically one of the indicators. The other indicator is that some customers may start to push out because they're not ready to receive equipment. That's also not the case. Ultimately see the first cancellations, that there's some overexcitement in ordering. That's also not yet seen, otherwise you would have heard that. That's what it is in an industry driven on the one hand by technology, on the other hand, by what's happening in society. VLSI, again, released this morning, the temperature for the industry and the title is simply, it's red hot. That means that all those drivers broadly, apparently, are still intact. Okay. A final question to understand the phasing a bit. I think over the last three quarters, your order intake has been around EUR 200 million more than your revenues. I assume that it also includes a few longer-term orders for hybrid bonding. When should normally that EUR 200 million also come into the revenue line? Gradually, yeah. You mentioned that very correctly. We have not only hybrid bonding tools, which have a longer lead time, but also plating lines. We have certain molding systems which have a longer lead time. Yeah, it is still, as I mentioned earlier, it's not that we are, let's say, having an enormous backlog, which spreads out over long periods of time. It's all very, let's say, determined in delivery and, of course, in specifications. We look at that very carefully. Okay. Clear. Thank you. And the next question- Thank you. is coming from Mr. Charles Shi, Needham. Please go ahead. Thank you for taking my question, Richard. I want to start my first question on hybrid bonding. I think you mentioned that in the first quarter you already see initial orders, and in the second quarter, you are seeing orders from two customers, and you expect more follow-on in the third quarter. However, I don't recall you are giving guidance when the initial revenue is going to be recognized. May I ask what the assumption should we make in terms of the first revenue recognition for hybrid bonding, understanding lead time can be long, revenue recognition can be a little bit deferred because these are the new kind of tools shipping to customers. I think it's fair to assume Q3, maybe Q4, certainly. We will have some revenue recognition on hybrid bonding already this year. That assumes that the qualification and also the applications are going ahead as planned. Got it. Thank you. Is there any way for you to quantify maybe the second quarter order, how much of that is coming from hybrid bonding? One thing I did notice is that the orders coming from subcontractors are a lot more than the IDMs in the second quarter. I have to assume a lot of the IDM orders are actually hybrid bonding for you to show up a very strong order from that part of the customer base. Well, we don't disclose orders individually. What we have indicated is that the ASP for hybrid bonders is around $2.5 million each. When we speak about multiple orders, and we've mentioned that in earlier calls, it's still in initial phase. It's for process qualification, sampling of devices. We mentioned there are certain Chiplets which are now sold into the market, which are assembled using our machines. In any case, it's still single-digit. Maybe that's a good indicator. Volume is expected for the first customer to be established in 2022, so next year. We should see more orders in the second half of this year for installation early next year and towards the middle of next year. A second customer is planning to set up production capabilities in the year thereafter, 2023. You're talking about double-digit system orders. That's what we also explained in the market day in June. That's where we're at. Thank you, Richard, for the color. The next question I want to ask is, adding on to the questions asked by other folks on the line earlier on the cycle. One thing I'm trying to reconcile is that you are sort of seeing the normal seasonality this year, although you did show a chart that the seasonality in terms of the Q2 to Q3 revenue decline is relatively mild if we compare with 2018, when the industry started to enter the downturn in the second half of that particular year. However, I think one of your peers is sort of guiding a flattish kind of Q2 to Q3 revenue progression. I really wonder, understanding that you are able to flex your capacity quite a lot in the second quarter, that may lead your revenue number track very closely to the underlying demand, while your competitor may have a little bit of difficulty to ramp up capacity as you do. However, I wonder whether there's another factor regarding the product mix you are shipping versus what competitors are shipping. Maybe your product is more seasonal or less seasonal than what your competitors are providing. Can you provide any color on that and help us understand your seasonality pattern view? Yes. I can certainly give some more. You mentioned already, let's say in the back end, you have a very broad range of capacity needs in the mainstream, let's say, general ICs, less complicated ICs, and then you have more in the high end. We are clearly more in the high end of the applications. Sometimes first rounds, second rounds. If you're more in the middle, and let's say also the mature products, it's more a volume aspect. You also mentioned the ability to ramp faster. That also distinguishes us from others. We've seen that in previous cycles. We've also gained in 2017 and 2014. We outgrew the average market growth by 50%. That's mainly because of the focus on those new device applications, and having demonstrated to be able to do that very quickly, to say it in that way. The time to market is critical. After demonstrating that cycle after cycle, we can now see that each cycle gets a larger share of that wallet. I'm speaking in general terms. The best is to look at it from high-end applications, which are also tooled up at subcontractors. It's not only IDMs. There are many IDMs who organize that through many subcontractors. In our product mix is also more the higher end of the middle market applications, where our systems consistently prove a lower cost of ownership. That also is very much proven in this cycle again. We also ask ourselves, "Why do these customers buy our machines?" Not because of price, because if you look at our margins, it's simply cost of ownership and time to market, and the reliability on time to market. Thank you, Richard, for the color. Thanks so much. Thank you for the answers. I'll get back to the queue. Thank you. Thanks. The next question is coming from Mr. Didier Scemama from Bank of America. Please go ahead, sir. Oh, good afternoon. Thank you so much for taking my question. My first question, Mr. Blickman, would be around the commentary you made earlier on the smartphone capacity reflected in your order book in Q1 and Q2. I wondered, could you share with us what you think the equivalent amount of mobile device shipments we could expect coming out of those orders in the second half year-over-year. That would be my first question. Thank you. Please help me to understand your question. You would like to know how many high-end mobile devices are built with devices coming out of our machines? Correct. For chips, not mobile phones. Well, we don't know. Second question. With regard to the commentary on your slide deck that the normal seasonality is Q3 down in terms of revenues and Q4 down as well, would you mind helping us understand the puts and takes on the Q4 revenue outlook at this stage, if you've got any thoughts on that, and if you want to share with us any forward-looking statement on 2022 directionally, if you think VLSI is a good guide for BESI, or if you've got a slightly different view, perhaps, share something along the lines of what one of your peers in the U.S. have already guided for. First of all, as we mentioned, we guide on the next quarter. We don't guide further out. That's because of the unpredictability of this industry and the lead time of our equipment. As responded to an earlier question, the guidance for Q3 is -5% to 15%, which is also in line with what we have experienced many years. The overall industry sentiment is, at this time, extremely positive. You mentioned VLSI. There's a sentiment still where there's no cloud in the sky. This is not unusual. In many cycles, I have experienced a few in a few years, that's what typically happens. We don't, let's say, follow whether it's VLSI or Gartner or others. We simply follow our customers. Our customer programs are, let's say, published also by those customers, Intel, TSMC, also Infineon, STMicroelectronics. They all present time and again updated CapEx, and sometimes they also refer specifically for advanced packaging investments. That is our guideline to prepare our business for those programs. We have no specific view on 2022, and certainly not on 2023, whether that will be higher or lower than 2021 so far. We frankly don't know. We are dependent on many factors, and that's what it is. Wonderful. I wondered if I could just clarify one thing, and I appreciate your candor. Did you say earlier that hybrid bonding equipment price was around EUR 2.5 million, and that you would expect to get double-digit orders for 2023? Is that units or value? Both units and value. Understood. For 2023? Yes. Okay, wonderful. Thank you very much. For further questions or remarks, please press star one. The next question is coming from Mr. Robert Sanders, Deutsche Bank. Please go ahead, sir. Hi, good afternoon. I just had a couple of questions. I don't know if you mentioned this before, I just was interested in your reaction to some of the Intel news overnight, Foveros Direct, Foveros Omni, et cetera. I was just wondering if you could maybe try and quantify what is the uplift in opportunity in terms of equipment sales from hybrid bonding versus EMIB, for example, or the first generation of Foveros. It's very difficult for us to really get a sense of that, obviously they seem very optimistic on Foveros Direct, their copper-to-copper hybrid bonding solution. I had a second question, which was just on the order breakdown. It seems like the subcontractors fell quite a lot. Is there anything you can talk about for the rest of the year? Do you think that you will have an IDM-predominant mix like you had in the second quarter? I know that's IDM plus foundry. Do you think the subcontractors could come back based on what you're seeing in terms of their level of loading, et cetera? Thanks a lot. Perfect. To start with the last question, we certainly see the sub-comms coming back. They do that per quarter, per half year. It's also widely publicized. They're certainly around again in Chinese sub-comms. In general, we are, and we discussed that many times, focused on the high-end, driven by IDMs on new product development and introductions. That is ongoing, and one of them is what you mentioned, the Intel roadmaps. We are surely, let's say, their ambitious programs, their acceleration for the past six months is very visible. There's increased demand, accelerated roadmaps. A lot of work for us to be able to accomplish those accelerated programs. That's for all what you mentioned, hybrids, chip-to-wafer. EMIB, I think will still be a bit behind those two. It's simply confirming what their objectives are. Major opportunities. Got it. Just to follow up on that, do you think, because you're guiding OpEx down sequentially and your temporary staff, I think reached, if I read it correctly, 581 in the quarter, and it was only 35 six months ago. Are you going to have to keep this elevated level of temporary staff, or is that more a function of the booking level, which obviously came down in the quarter? It's a function of booking level, and what also is very important is the number of machines to be installed, and the period required to organize that ramping. In clear terms, when you ship those machines to end customers, to get them hooked up and running and final tested for production, and for that, you need to increase your engineers. Sometimes these processes take longer. For instance, like in automotive, the qualification process is lengthy. For different applications, you need different number of people. Got it. Thanks, Richard. Thanks. The next question is coming from Mr. Nigel van Putten, Kempen & Co. Please go ahead, sir. Hi, good afternoon. I have one question specifically to the smartphone sort of strong demand you're seeing. Historically, you've seen periods of broad-based demand, but also very strong demand for a single application. How is that this year? There's been rumors that one company specifically has been asking its supply chain to do more. Typically, you guys are more dependent on new sort of innovations inside the smartphone itself. How is that this year? Is it multiple brands doing multiple things, or is it perhaps more concentrated than that? Thank you. Well, it is both because the 5G content is broader based. There's for different types, there are different developments. One is cameras, better cameras, better face recognition, screen technology. If you look at simply what we deliver into that world, it's again more than we did in the last round. The simple conclusion is that the content has changed because the numbers have not changed that much. There's some market share gain of one of the leading brands, but it's especially the content. It's fair to say that we are broader based in this round than in the previous round. That's comforting to hear. Thank you. One follow-up on Intel Accelerated, which was hosted last night. For both EMIB as well as Foveros, they have multiple generations now on the timeline. Without getting too specific, it seems like the micron pitch Of both EMIB and Foveros is sort of seeing multiple generations. Does that mean we're sort of entering almost a front-end cycle where specific to Intel then, where they introduce a new generation of, for example, EMIB, you would have to ship a new generation of machines, or, and this has also been the case historically, are your machines sort of up to standard to also help Intel already with the next generation's improvement? Long story short, do you sort of expect a new sort of replacement cycle or rather are the machines you ship today fit for purpose maybe five, seven years down the line? Thank you. Well, that's a very good question, a good observation as well. Intel over all those years, and for us it's over 30 years, has started with the 286 and all the way to today. 286 was late '80s. Intel invests no matter where we are in the cycle. It is predominantly new generations driven and all the public information about their programs which are currently under development will take many years to be established. It's not just for 2021, but for some they also mention already it's 2024, 2025 introduction. These programs can very well be over 10 years. If we look at our current systems at Intel, for instance for chip sorting, but also for final assembly of all their processors, these platforms were developed also 10 years ago and are still major production workhorses. If that repeats itself, then these development programs and also introduction and then production ramp are over many, many years. That's the same with the leading customer in Asia on that island. We also mentioned that already for four years we are in the development of this hybrid bonding. Early last year it was moved from R&D into production. Today, the highest-end devices are sampled in the world using our equipment. These are lengthy development programs similar to what you can see in the front end. Once you're in and you have been able to demonstrate and your capability is proven, qualified in other words, then these are programs which last for many, many years. Great. Thank you. Does that answer your question? Yes, thanks. For further questions. Any further questions? Or remarks, please press star one. There are no further questions. Please continue, sir. Well, I thank everyone to listen to this call and for your questions. If you have any further questions, don't hesitate to contact us. Thank you. Bye-bye. Stay safe. Ladies and gentlemen, this concludes the BASE event call. You may now disconnect your line. Thank you. The conference is no longer being recorded.