Good morning, good afternoon, ladies and gentlemen, and welcome to BESI's quarterly conference call and audio webcast to discuss the company's 2020 first 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 te Hennepe, Senior Vice President, Finance, and Ms. Claudia Vissers, 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 connection with the press release we issued earlier today, and then take your questions. I would like to remind everyone 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 first quarter ended March 31st, and also update you on the market, our strategy, and the outlook. First, some overall thoughts on the first quarter.
BESI performed very well in the first quarter in an environment which began with a promising industry recovery and ended with great social and economic uncertainties associated with the COVID-19 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 concern. We also want to thank everyone involved for their great efforts to maintain business continuity under such difficult working conditions. For the quarter, BESI reported revenue of EUR 91.3 million, which was at the midpoint of guidance and roughly flat in comparison to the fourth quarter last year, despite the many production challenges presented by the pandemic as it spread globally. Revenue was up 12.2% versus the corresponding period of last year, primarily due to increased demand for mobile applications.
In addition, revenue growth also reflected increased spending on logic applications for cloud infrastructure and artificial intelligence end markets. Continuing a trend from 2019, spending by Chinese customers remained healthy, representing approximately 39% of Q1 revenue and 32% of Q1 orders, despite the Wuhan outbreak, as BESI's Leshan operations and most Chinese customers were outside of the primary quarantine zone. Of note, sequential orders grew by 18% versus Q4 and 42.2% 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 and 2021. Automotive end markets remained soft due to stay-in-place travel and other social restrictions. BESI maintained attractive levels of profitability amidst unprecedented global economic conditions.
Due to our flexible Asian 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. BESI's gross margin of 56.7% increased versus Q4 2019 due to a more favorable product mix. Combined with lower than anticipated operating expense growth, net income reached EUR 13.9 million, an increase of 46.3% versus the first quarter of 2019. Similarly, our net margin grew to 15.2% versus 11.6% in the first 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 virtually all production was based in Asia. BESI's Malaysian operations have been deemed an essential industry and were recently permitted to resume full operations again.
Our Leshan, China, facility has been fully functional since early March. BESI Singapore has also been classified as an economic key sector and permitted to remain open with certain restrictions under regulations implemented on April 7th and scheduled to end on June 1st. In and North America, virtually all BESI 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 EUR 427.6 million in cash and deposits, along with an unused line of credit aggregating EUR 80 million, expandable to EUR 136 million at our option.
Further cash flow generation remains at healthy levels, with net cash increasing by EUR 18 million or 13.8% in the first quarter this year versus the fourth quarter last year, as we carefully manage working capital and cost. We intend to make the payment of 2019 dividend of EUR 1.01, approximately EUR 73 million 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 EUR 729.5 million since 2011. I'd like to speak a little bit about the current market environment. This next slide presents VLSI's climate trend index, which is a fairly good proxy to near term industry development.
As such, you can see in the fourth quarter 2019 and early 2020, we were just coming out of an extended industry downturn and moving towards gradual cyclical recovery. The virus outbreak became a pandemic and conditions deteriorated rapidly. Similarly, VLSI Research revised its 2020 assembly equipment market forecast in April to down 8.3% versus up 10.3% as late as February of this year. They anticipate that the market will be declined to EUR 2.8 billion in 2020, one of its lowest levels over the past 10 years. The VLSI estimate assumes that global economic activity regains some traction in Q3. Looking forward, VLSI expects the market to rebound strongly in 2021, 2022, with increases of 27.3% and 9.2% respectively from depressed levels currently.
Growth is expected to be driven primarily by 5G 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 second quarter 2020 revenue will increase by approximately 5%-25%. In addition, gross margin is expected to range between 56% and 58%, as per the current product mix anticipated. Operating expenses are expected to decline by 10%-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 2019. 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 our strong performance in the current adverse market conditions and by advanced packaging growth drivers, including 5G network adoption, artificial intelligence, and the continued build-out of cloud computing infrastructure, to name just a few. We have a leading position in advanced packaging, which is an important enabler of the digital society and the new applications to be 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 the question and answer session now. If you have a question or remark, please press star one now on your telephone. Star one for questions or remarks. Go ahead, please. Our first question is from Mr. Robert Sanders, Deutsche Bank. Go ahead, sir.
Yeah. Hi, good afternoon. My first question is just on the order strength you saw in Q1 from the subcon 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 various of the countries where your customers reside. I have a couple of follow-ups.
Robert, I am hesitant to answer your questions. Last time, it ended in such unacceptable personal insults. 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, Richard.
Yes, please.
Our next question is from Mr. Marc Hesselink. Go ahead, please, sir. Mr. Hesselink?
Yes. My first question is on the mobile applications in the order intake. What kind of mobile applications are 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, 5G. 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.
Is that for both Android and iOS?
Yes. Some are for both, some are for only iOS, but it's broad and also several high-end smartphone manufacturers.
Okay. My second question is, what are you seeing in the order behavior of clients? 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? What kind of discussions do you have at the moment?
Well, first of all, the overall environment is what it is. 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. Despite significant unrest starting end of February, or let's say second half of February, there is a reasonable trend upwards, which continues into Q2, also in April. That is positive, taking into account the negative news we hear around us all day.
Okay, thanks. My final question is on the supply chain that you're seeing today, because actually, you mentioned it 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 lockdowns, 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 till date. Why? One of the important changes is, as of yesterday, 100% reopening for 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. Currently, it looks better. That's also why we have indicated this larger range again. The orders are in, even more than that. Orders, as mentioned in April, also are very positive. It is what it is in the current situation. We can 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. Again, qualifying certain historical an suppliers simply to mitigate the risk, because number one, the one who can deliver wins in today's market. That looks very positive.
Great. Thank you.
Ladies and gentlemen, if there are further questions or remarks, you can still press star one on your telephone at any time. Star one for questions or remarks. Go ahead, please. 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-19-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 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? I'm kind of curious to see what you guys see in China from the build-up over there.
The final question is on the CapEx guidance by TSMC, also, if we look at the outlook for VLSI, they are rather cautious for the second half of 2020. I fully understand that you're not going to give any guidance for the second half of 2020, but maybe in the more broader terms, what do you see happening in the second half of this year? Thank you very much.
Great questions. Headcount up. If you simply take our revenue guidance and you compare that to revenue levels second half 2019, it is clear that we simply need some more headcount to meet the anticipated and already ramp in place. 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 we're able to lower our headcount. What you've seen is clearly anticipating and working already preparation of increased revenue. To compare the guidance, as also mentioned in the comments, H1 2019 compared to H1 2020 should be up. Second question, yes, Chinese customers are more and more developing their applications closer to leading-edge products from outside. Also, among the subcontractors in China are many suppliers who outside high-end smartphone manufacturers, both iOS and Android.
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 we all know. We deliver to customers directly, support those customers. That's a very broadening market position. Your next question is, of course, the zillion-dollar 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 one and a half years of correction, second half 2018 and full year 2019, inventory levels, capacity levels are low. It does not indicate a downturn for the industry based on these criteria.
It all depends how significant the impact of this pandemic will be on global economy, GDP, and also on semiconductor demand. Far, people are thinking positive. You have to be, as a supplier, prepared to be able to address that demand immediately. 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. Then also on that same subject, 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, et cetera. Do you think the increase you're seeing today is mostly tied to capacity or more technology?
Technology.
That might be technology, yeah.
Key is new features, and that's where CapEx is growing, anticipating on new product launches. That's similar in the smartphone world as in the logic world. In an environment which does not grow, as indicated by the temperature graph from Viavi, the anticipated growth for 2020 has slowed down, but the capacity build for new features has continued.
Right. That's clear. I think Qualcomm also last night said that they expect the number of 5G shipments to remain the same. They're mostly fabless. We could see some of what you're seeing in terms of order growth for OSATs tied to developments around 5G phones, if I'm not mistaken. That may cushion 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 5G modules, antenna modules, and modems. One of the key issues is the rollout of 5G. On the other hand, 5G compatibility in all of the high-end smartphones. The comments from Qualcomm in that sense were very positive. Again, in an environment which is careful.
Clear. I got a question also on the gross margin, maybe even tying into the split in terms of revenue. Margins for the first quarter are actually higher than the range. Impressive, considering all the supply chain issues everybody's talking about. There's a higher range, 56%-58% for the second quarter. In the press release, you've mentioned that's mostly mix. Is that something that is now because of this new investment cycle, you think there may be a shift in products or applications that would make gross margin structurally higher? Is that maybe too soon to make that conclusion?
There are three elements which are important. Maybe we should have been a bit more specific. Number one is the product position. That is currently, let's say, offering us the higher margin structure. Number two is our continued cost reduction programs. Despite the uncertainties and the shifting from China to Malaysia and back, we have ongoing cost improvements. Number three is the high US dollar. The increase of the U.S. dollar, it's a U.S. dollar business, has helped us. On the other hand, the Swiss franc has increased, and that is negative in terms of R&D cost. Overall, always the key in understanding gross margin is product position cost. That means for the second quarter, and we indicated mix is better than the first quarter. Also, the U.S. dollar content, and that could lead to a higher gross margin in the second than in the first quarter.
Lower cost, OpEx, gives us better net.
Yeah.
Lower tax rate.
Yeah. Got it. Last question. You said already twice, the company that delivers fastest gains the business. I think there was one bigger competitor that had plenty of issues in the first quarter, weren't able to ship. Were you able to take market share because of that? Is that structural or is that maybe too specific?
Well, whether it's structural or not, you don't know. Again, the developments on our supply chain, in our operations, we are constantly able to reduce our manufacturing lead time. That gives us a strong market position.
Yep.
With supply chain structure, we are also expanding that, as I mentioned earlier. In an uncertain market, decisions of customers are always at the last moment. That's what the market is today. Whether that tomorrow will improve, probably not tomorrow, but at some point it may. A lot still has to happen. We foresee that uncertainty continue, the focus on delivery is a key differentiator.
Great. Thank you.
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.
The conference is no longer being recorded.