Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's Quarterly Conference Call and Audio Webcast to discuss the company's 2019 Q3 results. You can log in to the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Lichtman, Chief Executive Officer and Mr. Korten Hennefer, Senior Vice President, Finance.
At this time, all participants are in a 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 Glickman.
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 other reports filed with the AFM.
For today's call, we'd like to review the key highlights for our Q3 9 months ended September 30 this year and also update you on the market, our strategy and the outlook. First some overall thoughts on our results. Besi reported another solid quarter in this challenging market environment with 3rd quarter revenue of €89,700,000 and a net income of €19,200,000 The better than anticipated performance was due primarily to fast turnaround shipments of epoxy die bonding systems to Chinese subcontractors as they seek to upgrade S.-China trade tensions. Orders of €82,200,000 in the 3rd quarter were roughly flat with orders in the 2nd quarter. In a quarter, traditionally weaker on a sequential basis due to seasonality.
Similar to last quarter, order rates reflected continued softness in high end mobile and automotive applications, partially offset by more stable demand for logic applications in cloud computing end markets. Profit levels this quarter also benefited from the continuation of 55% plus gross margins and a 9.7% reduction in sequential operating expenses. In fact, baseline operating expenses declined to €23,300,000 the lowest level in 4 years as the benefits of our strategic initiatives and operational realignment are realized. As such, we reached a net margin in excess of 20% for the 2nd consecutive quarter in the face of an extended market downturn. For the 9 months ended September 30, Besi's revenue declined by 39% versus the comparable period of the prior year.
The decrease was broad based across Besi's product portfolio and end markets in an ongoing industry downturn. Gross margins of 55.7 percent were achieved in the current 9 months period as management was able to rapidly align production overhead and supply chain activities in response to weaker market conditions. In addition, personnel levels were significantly reduced with total headcount declining by 2 80 people or 14.6 percent between the end of the Q3 last year and the end of the Q3 this year. Besi generated net income of €47,600,000 year to date resulting in a net margin of 18% and cash flow from operations of €83,800,000 or 32% of revenue. This highlights the profit and cash flow generation of our business model even in a difficult year.
Besi's liquidity also improved in the Q3 with net cash of €106,900,000 increasing by €20,800,000 or 24.2 percent versus the Q2 of this year despite share repurchases totaling 13 €100,000 during the quarter. Strong cash flow generation this quarter resulted primarily from the absence of seasonal tax payments, which we paid in the Q2 and to a lesser extent reduced working capital requirements. Year to date, we've made €161,300,000 of distributions to shareholders in the form of dividends and share repurchases, continuing our strong commitment to enhance shareholder value. During the quarter, Besi repurchased 504,337 of its ordinary shares for a total of €13,300,000 cumulatively as of September 30 this year, a total of 2,900,000 shares have been purchased under the current €75,000,000 share repurchase program, which started July 26, 2018, at an average price of 21 €0.31 per share for a total of €61,300,000 As of September 30, 2019, AG held approximately 7,700,000 shares in treasury at an average cost of €16.57 equivalent to 9.7 percent of total shares outstanding. The company will extend its current program until October 26, 2020, but reduce its daily share repurchase activity over the next quarters in accordance with restrictions on its ability to purchase more than 10% of shares outstanding without AGM approval.
Next, I'd like to speak a little bit about the current market environment. VLSI Research has recently adjusted its assembly equipment forecast now looking at 20% for 2019. PLSI see a gradual recovery in 2020 of 2.4%, which accelerates in the second half of the year following followed by a larger rebound of 17.9% in 2021. VLSI's climate change index presented on this next slide shows the beginnings of an upturn, which began late this summer. From our perspective, we see mixed signals coming from the marketplace.
Positive indications of renewed customer interest in advanced packaging applications and capacity purchases by Chinese subcontractors are balanced by continued overcapacity at many customers, shifting supply chain dynamics and global trade tensions. Although we realized better than anticipated 3rd quarter revenue and order activity to date in the 4th quarter, we maintain a cautious outlook. This year we've seen an increased focus on the assembly interconnect function as part of the front end design process as producers move to below 40 nanometer geometries with ever increasing functionality, density and complexity. At present Besi is actively involved with leading customers to develop new assembly solutions for the next investment route. Areas include 5 gs antennas, micro LED screens, hybrid bonding interconnects for below 10 nanometer smartphone devices, high volume TCB systems for advanced memory and logic applications and high speed flip chip systems for the assembly of below 5 micron accuracy microprocessors.
As such, R and D activity has been increasing in recent quarters with technical headcount added in Europe to support customer focused efforts. And now a few words about our outlook. For the Q4, Besi estimates that revenue will be equal to the Q3 plus or minus 5%. The sequential revenue trend is of note and that the typical Q3, Q4 progression is usually down an average of 10%. Further, we anticipate that gross margins will be in the range of 54% to 56% due to our anticipated product and customer mix.
Finally, operating expenses are forecasted to increase by between 5% 10% sequentially versus the Q3, primarily due to higher R and D spending and seasonal influences. In summary, we are very excited about our prospects for the next industry upturn given Besi's performance in the current downturn, leading edge advanced marketing technology, engagement with customers and highly scalable production model. That ends my prepared remarks. I would like to open the call now for some questions. Operator?
Yes. Thank you. The first question is from Mr. Peter Olofsen, Kepler. Your line is open.
Please go ahead, sir.
Good afternoon, gentlemen. I have a couple of questions, so maybe best to do it 1 by 1. The first question I have is on the demand from the Chinese subcontractors, which seems to have been a bit stronger both in Q2 and Q3 than what you initially expected. In press release, you referred to the trade tensions. So I assume it's related to the relocation of certain supply chains.
The question I have is, how much visibility do you have on this demand relative to maybe some other parts of your business? And how sustainable do you think the demand is also in light of China's ambitions to grow its domestic semiconductor industry?
Well, first of all, in the current environment, everyone is clearly cautious. So any strategic capacity expansions are, let's say, planned in the last moment. So we have witnessed in Q2 and Q3 favorable orders from Chinese subcontractors. And apparently, this trend is to continue. And what we read is that the dependency on imports from outside of China has to be reduced.
So our product offering is the number one choice and at the same time producing this equipment in China has put us in a very good position to benefit from the strategic investments in China. How long that will last is a very difficult question to answer.
Okay. But it's not driven by one particular end market or application? It's across a number of markets?
It's across a number of markets, but of course, the high end smartphone market is a big driver.
Okay. Which brings me to
So preparation for the next infrastructure in the world, but also automotive, although automotive is a bit slower at this moment. But your question is a very good one. It's across the board.
Okay. Which basically brings me to my next question, which is around 5 gs. We originally heard from TSMC that they have become more positive on 5 gs related demand compared with 6 months ago, and that was also one of the main drivers for them to increase their CapEx budget for this year. Based on the discussions that you have with your customers, do you also sense that prospects have improved and that maybe your customers have become a bit more optimistic there on the 5 gs demand also for next year?
Yes. But you have to be a bit more precise. There will be several technology rounds in 5 gs. The first round and it's primarily related to bandwidth is a first, let's say, enabler. And that needs certain devices, but also antennas to be able to be compatible for that first bandwidth generation.
And followed in a year or 2, we should see a higher bandwidth, which needs significantly more technology into the high end smartphones and also instead of 1 antenna, they need 3 antennas, which the basic messages were only at the beginning. But it is coming. But don't expect everything to come at once. But that's also a very, very good sign.
Okay. But to understand correctly then the chip content or the antenna content per device will increase over time with okay. And maybe it's a little bit early, but your customers, do they give you already some give you some indication of how many 5 gs smartphone shipments they expect for next year?
No. They like with every generation so far that is because there are many participants in that market, which we all know. And they're struggling for their share of that demand and they will only tell us at the very last moment. But we are qualified with all of them. So that gives us unique opportunities.
Okay. There may be a question on R and D, where you mentioned in your outlook that R and D spending will be higher in Q4. Is that something you had already been planning for? Or have you recently decided to step up your R and D efforts in certain areas?
Well, we've shared all along that, let's say, over the past decade, you see R and D spending grow from mid-20s, dollars 20,000,000 per year, dollars 25,000,000 dollars to $35,000,000 $36,000,000 and it will move gradually to $40,000,000 and beyond that in the next 2 years to EUR 45,000,000 simply because number 1, further miniaturization requires more complex interconnect technologies. And at the same time, our market position with the leaders in this industry, that market position has improved, increased and that requires more development. So gradually you will see that increase and hopefully it will lead to more revenue with higher margins.
Okay.
And then It's not a sudden change.
No, no, no. As you pointed out, we have seen it increasing over time. But you did specifically mention it in the outlook. So I was just curious whether there was maybe some pull in or acceleration or something. It's basically continuation of the trend that you had in mind.
Yes, but compared to a year ago, the scope has definitely increased.
Okay.
And we've added more headcount in R and D. This year, we will add, but we mentioned that in the previous call as well, now close to 40 people. And if you simply do a quick math, what an engineer costs per year and you multiply that by 40, you also know how much the spending increase.
Okay. That's helpful. And then lastly on 3 d sensing in mobile. 2017 was a very strong year for you, also helped by the introduction of front facing, 3 d sensing by one of your major customers. This customer is expected to also introduce 3 d sensing on the back of the phone next year.
Could this be an opportunity of roughly similar size of what we saw in 2017 or is it really different?
Well, it's fair to say that the and also there we mentioned this in several calls. In 2017, an enormous capacity was installed, you could say overcapacity, which is gradually absorbed. And part of that is used for further development of this face recognition technology. And it's expected in next year that certain limitations will need expansion to be added on to those capacities. How much is hard to tell.
But it will not be in my view the similar size because it's not a brand new feature. All these features at the beginning when they're brand new, they offer a spike. And when they're further development, when they're further developed over time, It's more tested we added, but not from scratch. That's the message. Okay.
And you have to wait like 5 gs, those 5 gs antennas are brand new. So that's a wonderful new feature, if you could call it that. And there are many others to be expected.
But if you look at the 3 d sensing technology, it seems that the technology will be slightly different, I. E. Time of flight instead of structured life. Does it really matter for you? Can they basically use the same type of equipment that they have been using since 2017?
Or will it also require maybe some new type of assembly technology?
Yes, they would also need some new type of new features on equipment, different equipment. But again, the volumes are hard to predict.
Okay. That's it for me. Thank you.
Thank you.
The next question is from Mr. Marc Hesselink, ING. Your line is open. Please go ahead, sir.
Yes. Thanks for taking the questions. First question is on so this new the R and D that you spend on the new applications, and we have to wait until this if this becomes successful, if this is being used, when can we see that? Is that going to be in the Q1 of next year?
No, it's program by program. And don't forget, we are just a little link in the total supply chain. So we all of us in that supply chain are dependent upon the success of the development of each analytical step, plus market introduction timing decision. So to give precise, of course, these customers have roadmaps, but those roadmaps change because of the reasons just mentioned. What you will see in the course of next year and also longer out there because many developments take more than a year, some developments even 3, 4 years ahead, they will kick in at certain points.
And usually what happens when they kick in, it's a first ramp, but then it takes some time before you have a second ramp. It's very unique that it all of a sudden ramps in big volumes. So my answer to your question is that the timing is hard to forecast based on technology solutions and not just from our part of the game, but also from many others in the supply chain.
Okay, clear. And then the second question is on the your positioning in the Android supply chain. You've gradually been moving deeper in that one. What are you seeing there now? Is that gradual movement into that supply chain is still continuing?
Or is it accelerating?
It's still continuing. As a matter of fact, the 5 gs antennas, the first qualifications were in the Android world, which is not surprising if you follow the news. So in any case, Android is very important for us.
Okay. Clear. And then the final question is on the microLED that you mentioned. It seems that, that can be quite a big one for you. So could you tell a bit more about it, how your positioning would be in that and when it would come and how it would come over time?
Well, that's longer. If you follow the general implications about moving from OLED to micro LED, that's a big broadly publicized development in this world because it offers many advantages, but there are also many versions to be expected. If you look at timing, that's typically timing 2, 3 years out, But many developments are currently ongoing with multiple companies in this world. So yes, it offers a unique new world term, but still a lot has to happen. So that also won't materialize in the Q1 next year.
But potentially it has an enormous impact on our sector.
And then from And then from your perspective, you're now better positioned for that product than your competition?
Well, that's also hard to tell. We are very well positioned because we have unique technology in the most accurate placements, which is required for these applications, but at the same time accuracy and speed. So our systems are very well positioned to benefit from this development. But are we better positioned than competitors? Who am I to say that?
Okay. Thank you.
The next question is from Mr. Wim Griller, ABN AMRO. Your line is open. Please go ahead, sir.
Yes, good afternoon. My first question would be on the headcount that you mentioned in relation to the R and D, so the headcount in Europe. The overall headcount in Europe has not moved up yet, yet you are kind of adding headcount to the R and D base. So how should I look at it? Is it more a shift from, let's say, general functions towards R and D, I.
E, the headcount in Europe overall stays flat? Or do you also expect that overall headcount in Europe to go up in the quarters to come? My second question would be on the government subsidies. Can you give us a bit of an indication on what a normal level quarterly run rates would be for the subsidies and what it was in the Q3 of this year?
Your first question is a very good one. The second one also, but let's spend some time on the first one. The move from West to East and so from Europe to Asia and especially to Singapore of 2 things, admin and also the admin of spare parts service has helped to reduce headcount in Europe in the past 2 years and also especially last year. And on the other hand, we've added R and D stock because the key development capabilities are Europe for packaging and plating in the Netherlands, for dietetics in Switzerland and Austria. So in the net, you're right, you don't see that so much.
But as I mentioned before, we've added some 40 people in R and D. And in a similar way, we have reduced headcount in the areas as mentioned, which has gone very smoothly. If we look at subsidies, subsidies are not, let's say, a constant flow. They depend on programs. They depend on also government priorities.
So you can't simply model that. They have increased them for the simple reason and they may well increase going forward simply because our position of those products in their end markets have a greater importance in the requirements for whether you qualify for certain subsidies or not. A lot is customer supported as well. So you have to have a combination of customer and product development. But this all falls into the decision of political entities and that is hard to forecast.
Very clear. And then my last question would be on the Chinese fast turnaround orders, which you benefited from in the past two quarters. Can you remind us on kind of how that works? So what is kind of the lead time for you to receive an order and to ship the machine or at least be able to
recognize the revenue? And in the
last two quarters, what is, roughly speaking, the order of magnitude of these last minute orders in overall sales?
Well, the fastest turnaround of it's not just one type of machine, there are various, but let's focus on the fastest. We can do that in 4 weeks. That's also because of the unique setup of our supply chain. And that quick turnaround also helps us in capturing a big share of the demand. There are other systems which take a bit longer, 8 weeks to 10 weeks.
So quick turnaround, quality, superior is what are the determining factors apart from competitive pricing.
Very clear. And then in terms of revenue recognition, remind me how that works. Do you recognize the revenue when you ship the product or when you received the order?
You certainly note when you received the order. Revenue recognition depends on several factors, which are very critical. But Kare, please explain this.
Basically, we recognize revenue when we ship the system. And in IFRS, you're only allowed to do that once the system is shipped. You can demonstrate history that you know for sure that the system will perform its tasks as specified by the customer. And the work you have to do afterwards, so basically installation, is, let's say, insignificant. So in I think 98% of our shipments, we can recognize revenue.
At the moment, we ship a system to the customer. Only when it's new technology, then it you have not demonstrated yet that the technology is working. We wait until we have the final acceptance from the customer on the site.
That's very clear. Thank you very much.
The next question is from Mr. Nigel Van Putten, Kempen and Co. Your line is open. Please go ahead, sir.
Hey, good afternoon. I'd like to ask just one question on I'm just hearing your thoughts about the outlook in 2020, maybe without getting too specific in terms of applications. I count a couple of potential drivers. On the one hand, there's technology at the higher end of the market, but there's also substitution at the lower end from wirebond to flip chip. There's completely new features in analog like 5 gs antennas and there's also the potential for a cyclical recovery in a couple of end markets, I guess automotive would be a good example.
So my question would be just maybe without handicapping a couple of those, would you argue that we are maybe indeed in terms of at the start of an upcycle, even though the eventual timing of a lot of these drivers will be unclear.
Yes. But you could add to your consideration, and we've seen that in many cycles and for me it's a bit more than many of others and there were 35 years. The longer a downturn lasts, the more uncertainty about the recovery. And then when that recovery happens, it happens very fast. Of course, there are the key drivers and you mentioned them.
Although the magnitude of the upturn depends again very much on GDP. So concluding, it's very hard to tell. 2020 looks like a turning could be a year like 2016 when we had a downturn in 2015, which didn't last as long. But then you had a gradual upturn developing in 2016 and a large expansion in 2017. Whether that's the same model for 2021, nobody knows.
But you have to be prepared for that. You have to be able to ramp 60% quarter on quarter. And that means you need to have your supply chain prepared, you need to have your organization prepared to begin with And that's what's key, apart from the developments in those next drivers.
Thanks. And maybe as a follow-up, a question was asked before. You've said, as always, you'll hear at the very last moment in terms of potential new orders from especially, I guess, smartphone suppliers. Would that in terms of seasonality still stick that number around or that date around maybe the end of January, maybe February around Chinese New Year? Would that be sort of a key moment for you to know more about the potential of one of those potentially quick ramps into next year?
Yes. That's usually but in December and simply follow the daily stream of information from this whole sector and especially our customers, the key ones pick the winners. And everyone is focused on that. So when it comes to us and typically it comes in January, February, That's about the pattern.
That's fair. Thank you.
Any more questions?
Mr. Sanders, your line is open. Yes.
Hi. Good afternoon. I just had another follow-up on MicroLED. It does seem like that technology is moving to the manufacturing feasibility stage, which is where you guys would potentially come in. So what does your research tell you about how many times faster does the sort of pick and place technology need to get to before we reach cost effectiveness?
And related to that, I mean, were you to get this business, I'm assuming you would have to develop an entirely new machine, which would consume a lot of R and D. So would you consider taking pre funding to mitigate the risk of developing this tool and then the technology not working as a whole? And I have one follow-up. Thanks.
As I mentioned in the earlier question about microSDD, this is still longer takes a longer development time to become major volume in the world. And you can read that in many publications. But you're very right, to participate in that world, you need the unique technology development, which addresses that and then equipment, which makes it happen. And but those developments are daily bread and these are reason of existence.
So you don't see as a particularly onerous development effort in terms of dollar millions for you guys given your history and expertise basically?
No. This fits into the overall R and D spend of what I mentioned today in high 30s, next year growing towards 40 into the mid-40s. That's what it takes.
Got it. And I just was on the call of another company in Europe and they talked about some having some issues with export licenses in Taiwan, Korea and China. I just wondered if you had any issues related to getting into markets or getting products approved or anything like that, just to check? Thanks.
No, not with us. We had this check before the summer. None of our products are blacklisted. So we have no issues. Great.
Thank you.
We check that, of course.
The next question is from Mr. Peter Olofsen, Kepler. Your line is open.
Yes, sir. Thank you. I had a follow-up on share buybacks where you commented in the press release that you are extending the program and then reducing the daily purchase volume. But just to be clear, once you reach the 10% authorization, there's no plan to cancel shares. So basically, at that moment, the possibility to do buybacks would end.
Is that correct?
Well, you're very right. If you have the authority to buy up to 10%, you buy more, you have a big issue. So we won't do that. But then at the shareholder meeting end of April, we'll have to ask permission to buy more.
Cancel shares.
You can also cancel some shares. But you can do something because the 10%, if that's the limit, that's the limit.
But do you have the plan to cancel shares then or is that still to be discussed?
Yes, it's either or both, but we will do something. I mean, if we continue to generate returns which help to create shareholder value then that's what we're going to do. And we've done that for years. We started to buy back shares in 2,001, 18 years ago.
Okay. So in the run up to the AGM, you will probably come up with a proposal then to
Yes, certainly. Yes.
Okay. We'll wait for that. Thank you.
Excellent.
There are no further questions at this moment.
Well then, thank you all for taking the time and asking questions. If you have further questions, don't hesitate to contact us. Thank you. Bye bye.
Ladies and gentlemen, this concludes the conference call. You may now disconnect your line. Thank you for joining and have a very nice day.