The conference is now being recorded.
Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's 20 21st 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, Mr. Cor de Hennefer, Senior Vice President, Finance and Mr.
Hedrick van Kerkhoff, Senior Vice President, Finance. At this time, 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. I will begin by making a few comments in 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 Q1 ended March 31, and also update you on the market, our strategy and the outlook.
First, some overall thoughts on the Q1. Besi performed very well in the Q1 in an environment which began with a promising industry recovery and ended with great social and economic uncertainties associated with the COVID-nineteen pandemic. Since its outbreak, we have taken precautionary measures to protect the safety and the health of our employees, customers and suppliers, which is of our utmost under such difficult working conditions. For the quarter, Besi reported revenue of €91,300,000 which was at the midpoint of guidance and roughly flat in comparison to the Q4 last year, despite the many production percent versus the corresponding period of last year primarily due to increased demand for mobile applications. In addition, In infrastructure and artificial intelligence end markets, representing approximately 39% of Q1 revenue and 32% of Q1 orders.
Despite the Wuhan outbreak as Besi's Lusan operations and most Chinese customers were outside of the primary quarantine zone. Of note, sequential orders grew by 18% versus Q4 and 42.2 percent versus Q1 2019, reflecting renewed investment by high end handset manufacturers and their respective supply chains to add capacity in anticipation of product introductions in 2020 2021. Automotive end markets supply chain, labor force and assembly capacity, we were able to shift production and final assembly sufficiently between our Malaysian and Chinese and even Singapore facilities to satisfy customer demand. Asia's gross margin of 56.7% increased versus Q4 2019 due to a more favorable product base. Combined with lower the Q1 of 2019.
Similarly, our net margin grew to 15.2% versus 11.6% in the 1st quarter last year. At present, Besi is operating with varying restrictions on its production capacity and supply chain activities depending on location. At the end of the first quarter, nearly 70% of Besi's employees and industry and were recently permitted to resume full industry and were recently permitted to resume full operations again. An on April 7 and scheduled to end on June 1. In Europe and North America, virtually all basic personnel are working remotely with careful adherence to local regulations.
Our supply chain network is based primarily in Asia and has functioned reasonably well considering the circumstances. So far, we have benefited from our dual source supplier strategy and advanced purchases of components deemed critical to Besi's operations. Issues to date have been related primarily to non critical items. We have a strong balance sheet to weather the current crisis. Besi ended the quarter with €427,600,000 in cash and deposits along with an unused line of credit aggregating €80,000,000 expendable to €130 6,000,000 at our option.
Further cash flow generation remains at healthy levels with net cash with manage working capital lend cost. As such, we intend to make the payment of 2019 dividend of 1 €0.1, approximately €73,000,000 in May 2020 as well as continuing regular share repurchases to cover incentive compensation and dilution from the convertible notes. Including the payment of this dividend, we will have returned to shareholders €729,500,000 since 2011. Next, I'd like to speak a Index, which is a fairly good proxy to near term industry development. As such, you can see in the Q4 2019 early 2020, we were just coming out of an extended industry downturn and moving towards gradual cyclical recovery.
Then the virus outbreak became a pandemic and conditions market forecast in April to down 8.3% versus up 10.3% as late as February of this year. Further, they anticipate that the market will be declined to $2,800,000,000 in 2020, one of its lowest levels over the past 10 years. The VLSI estimate assumes that global economic activity regained some traction in Q3. Looking forward, Veolia expects the market to rebound strongly in 2021, 2022 with increases of 27.3 percent and 9.2 percent respectively from depressed levels currently. Growth is expected to be driven primarily by 5 gs network expansions, continued investments in cloud infrastructure and artificial intelligence applications and a new PC upgrade cycle.
Now a few words about Q2 guidance. Based on feedback from customers and suppliers, we forecast that the Q2 2020 revenue will increase by approximately 5% to 25%. In addition, gross margin is expected to range between 56% 58% as per the current product mix anticipated. Operating expenses are expected to decline by 10% to 15% versus Q1, primarily due to lower share based compensation expense. As a result, we expect Besi's H1 2020 financial performance to be higher than the first half of twenty nineteen.
However, it is difficult to look beyond the first half year given the current unpredictable course, recurrence and severity of this virus in leading developed economies and its implications for the semiconductor industry demand. Despite near term uncertainty, we are optimistic about Besi's prospects in the next investment cycle as the world accelerates its move to the digital society. Our longer term optimism is supported by a strong performance in the current adverse market conditions and by advanced packaging growth drivers, including 5 gs network adoption, artificial intelligence and the continued build out of cloud computing infrastructure to name just a few. We have a leading generated along with it. Combination with new strategic initiatives, a highly scalable and flexible production model and ample liquidity, we are well positioned to take advantage of industry opportunities no matter which way the market moves in the quarters to come.
That ends my prepared remarks. I would like to open the call for some questions. Operator,
please. Thank you, sir. Ladies and gentlemen, we're starting Our first question is from Mr. Robert Sanders, Deutsche Bank. Go ahead, sir.
Yes. Hi, good afternoon. My first question is just on the order strength you saw in Q1 from the sub PON end market. I was just wondering if any of that strength was driven by a sort of scramble for capacity given some of the supply chain disruptions out there in your in various of the countries where your customers reside? And I have a couple of follow ups.
Robert, I'm hesitant to answer your questions. Last time, it ended in such unacceptable personal insults that I do feel that your way of participating in our company is unacceptable.
I'm sorry, you feel that way. Maybe we should take that offline, Rajesh.
Yes, please.
Our next question is from Mr. Mark Kesselink. Go ahead please sir.
Yes, thanks. Yes, yes. My first question is on the mobile applications in the order intake. What kind of mobile applications are that? Is that did you have significant design wins in there driving that?
Yes. It is design wins and also new features into next generation models. One of them is of course 5 gs. Another one is the next generation facial recognition. There are also other features which have newly been designed and will be introduced in next generation models.
And is that for both Android and iOS or?
Yes. Some are for both. Some are for only iOS, but it's a broad and also several high end smartphone manufacturers.
Okay. And then second question is, what are you seeing in the order behavior of clients? Are they clearly, the order intake is still good, but are they maybe pushing it out a little bit, really putting it in at the last moment? Or what kind of discussions do you
have at the moment? Well, first of all, the overall environment is what it is. And Orders are placed timely. And as you can see in Q1, it is indicative that our guidance, which was a very broad range, actually ended somewhere close to the middle. So despite significant unrest starting end of February or let's say second half February, there is a reasonable trend upwards, which continues into Q2 also in April.
So that is positive taking into account the negative
Okay. And then final my final question is on the supply chain that you're seeing today because actually it seems you mentioned in the press release, but looking at the numbers, it seems that there was not too much impact on maybe lost revenues because of the supply chain disruptions. If you look ahead, now that you had the initial setbacks of the load plans, is there still significant risk of supply chain disruptions going forward?
Well, it's a very good question. And it can be answered with as it looks now less risk than we had from end of February is as of yesterday, 100% reopening of our facility in Malaysia and also all of the subcontractors in Malaysia. That should give us less risk going forward. China already, as mentioned, since early March, things started to improve, the whole supply chain as well gradually. The only risk, of course, we have is a recurrence of a corona outbreak.
Looks better. That's also why we have indicated this larger range again. The orders are in even more than that, manage very well. We have for many dual source. We have also more than dual source, triple.
We have immediately also widened the scope of subcontractors. Also again qualifying certain historical European suppliers simply to mitigate the risk because number 1, the one who can deliver wins in today's market. So that looks very positive.
Okay. Thank you.
Our next question is from Mr. Wim Gille, ABN AMRO. Go ahead sir.
Yes. Good afternoon. I got a few questions. First of all, I noticed that the headcount in Asia went up by 34 temps quarter over quarter. Is this more to resolve some COVID-nineteen related inefficiencies?
Or are you preparing for some additional volumes in the second quarter? The second question I have is on the demand that you see from your customers. It's mainly the Chinese customers, which are driving demand at this particular moment. What do you see? What are they kind of preparing for?
Or what are they building? Are they just ordering mainstream equipment? Or are they now also increasingly ordering equipment to move into leading edge applications? So I'm kind of curious to see what you guys see in China from the buildup over there. And then the final question is on the CapEx guidance by TSMC.
And also, if we look at the outlook for VLSI, they are rather cautious for the second half of twenty twenty. And I fully understand that you're not going to give any guidance for the second half of twenty twenty, but maybe in the more broader terms, what do you see happening in the second half
of this year? Thank you very much.
Great, great questions. 1st, headcount up. If you simply take our revenue guidance and you compare that to revenue levels second half twenty nineteen, it is clear that we simply need some more headcount to meet the anticipated and already ramp in place. So headcount related, but as you may know, we have a very solid flexible layer in Asia, which helps us to accelerate rapidly, but also if revenues go down quickly are able to lower our headcount. But what you've seen is clearly anticipating and working already preparation of increased H1 twenty nineteen compared to H1 twenty twenty should be up.
2nd question, yes, leading edge products from outside. But also among the subcontractors in China are many suppliers to outside high end smartphone manufacturers, both iOS and Android. So it's not only China clearly day by day, step by step, they are moving up the ladder into leading edge technologies. That is for us a very positive development because we also have our facility in China as well know. We deliver to customers directly, support those customers.
So that's a very broadening market position. Your next Your next question is, of course, the $1,000,000,000 question, I would say. The CapEx guidance from everyone, clearly, it's very uncertain how the economic impact will translate in the demand for semiconductors in the second half of this year. Although for assembly capacity after 1.5 years of correction, so second half twenty eighteen and full year 2019. Inventory levels, capacity levels are low.
So it does not indicate a downturn for the industry based on criteria. But it all depends how significant the impact of this pandemic will be on global economy, EDP and also on semiconductor demand. So far people are thinking positive. You have to be as a supplier prepared to be able to address that demand immediately. So again, the one who delivers the fastest is the winner.
Thank you very much. Thank you.
Our next question is from Mr. Nigel van Putten, Kempen. Go ahead please sir.
Hi, good afternoon. I've got two questions on the growth of OSAT's business into the quarter. First off, is that all China or were also other countries like Singapore or Malaysia contributing to the increase?
Mostly Taiwan.
Taiwan, of course.
Taiwan, China and somewhat Korea.
Great. And then also on that same subject, I mean OSATs in the past have always been more of a capacity build. But I think that more recently, some of the bigger ones have become more vocal on their role in advanced packaging, etcetera. So do you think the increase you're seeing today is mostly tied to capacity or more technology? Technology.
There might be technology, yes.
Key is new features and that's where CapEx is growing, anticipating on new product launches and that's similar in the smartphone world as in the logic world. So in an environment which does not grow as indicated by the temperature graph from VLSI, the anticipated growth for 2020 has slowed down, but the capacity built for new features has continued.
Right. That's clear. I think Qualcomm also last night said that they expect the number of 5 gs shipments to remain the same. So they are mostly fabless. We could see some of what you're seeing in terms of order growth for OSATs tied to developments around 5 gs phones, if I'm not mistaken.
And that may caution somewhat the uncertainty in the second half. Is that a correct sort of summary?
That's only one. That's only one, and we are in the middle of that. We have gained significant market share in those 5 gs modules, antenna modules and modems. One of the key issues is the rollout of 5 gs. Then on the other hand, 5 gs compatibility in all of the high end smartphones.
And the comments from Qualcomm in that sense were very positive. Again, in an environment which is careful.
Okay. I've got a question also on the gross margin, maybe even tying into the split in terms of revenue. Margins for the Q1 are actually higher than the range, impressive considering all the supply chain issues everybody is talking about. But also there's a higher range, 56 to 58 for the Q2. In the press release, you've mentioned that's mostly mix.
Is that something that is now sort of a is that because of this new investment cycle? You think there may be a shift in products or applications that would make gross margin structurally higher? Or is that maybe too soon to make that conclusion?
There are 3 elements which are important. Maybe we should have been a bit more specific. Number 1 is the product the higher margin structure. Number 2 is our continued programs. Despite the uncertainties and the shifting from China to Malaysia and back, we have ongoing cost improvements.
And number 3 is the high dollar. So the has increased and that is negative in terms of R and D cost. Overall, always the key in understanding gross margin is product position cost. So that means for the Q2, and we indicated mix is better than the 1st quarter, Also the dollar content and that could lead to a higher gross OpEx gives us better net.
Yes, maybe
Yes, got it. Last question, You said already twice the company that delivers fastest against the business. I think there was one bigger competitor that had plenty of issues in the Q1, weren't able to ship. Were you able to take market share because of that? And is that structural?
Or is that maybe, too specific?
Well, whether it's structural or chain in our operations, we are constantly able to reduce our manufacturing lead time. And that gives us a strong market position. Also with supply chain structure, and we are also expanding that, as I mentioned last moment. That's what the market is today. Whether that tomorrow will improve, probably not continue,
We have no further questions, sir. Please continue.
Thank you all for listening in. If you have any further questions, don't hesitate to contact us. Thank you. Bye bye.