Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's 2019 Q2 results. You can log in on the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Bittman, Chief Executive Officer and Mr. Corke Hennepe, Senior Vice President, Finance.
At this time, all participants are in a listen only mode. And 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 of the company. I would now like to turn the call over to Mr. Richard Blickham.
Go ahead please, 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 2nd quarter and 6 months ended June 30 and also update you on the market, our strategy and the outlook. First, some overall thoughts on our results. Besi reported solid results in Q2 with revenue of €92,700,000 and a net income of €18,900,000 increasing sequentially by 13.9% 98.9% respectively versus the Q1 of this year. Gross margin of 56% was at the midpoint of guidance and sequential operating expenses declined by 13%, a bit better than anticipated. Bookings of €82,700,000 in the 2nd quarter confirmed an order book, which has stabilized over the past 3 quarters after falling significantly from peak 2017 and the Q1 2018 levels.
The current order book reflects continued softness in the high end mobile and automotive applications this year partially offset by more stable demand for logic applications in cloud computing and markets. We also returned €135,100,000 to shareholders during the quarter in the form of dividends and share repurchases, underscoring our ongoing commitment to enhance shareholder value. Our better than anticipated performance in Q2 this year resulted primarily from higher than anticipated shipments of Diebenic Systems to Chinese and Asian subcontractors, along with tight controls of production and personnel overhead. As such, we were able to double net income sequentially in the Q2 on a 14% revenue increase. In addition, we reached a net margin in excess of 20% during the quarter in the face of a significant market downturn.
Headcount was up slightly sequentially due to production temp workers needed for higher than anticipated shipments. As seen in this next chart, Besi has maintained remarkably consistent gross margins both in good markets and bad. We have been able to achieve attractive returns on revenue and equity in various environments by means of our flexible production and supply chain model, pricing discipline and timely execution of headcount reduction initiatives. Our customer alignment and profit versus market share strategy have further contributed to our performance. When the tide ultimately turns, we have the organizational structure in place to ramp production rapidly to meet customer demand.
The next chart shows the Q2 2019 OpEx levels have been brought down to 20 fifteen-sixteen levels during this downturn. We anticipate that headcount will continue trending lower for the balance of the year based on work we're doing to streamline SG and A functions across the organization and cutting back some fixed Asian overhead after its significant ramp between 2015 2018. However, it's expected that European R and D headcount will be increased in the coming quarters as we support customer roadmaps for the next investment route. In terms of liquidity, we ended the 2nd quarter with cash and deposits of €361,700,000 and a net cash of €86,100,000 The €143,600,000 sequential decrease from end of Q1 2019 was mostly due to dividends paid and shares repurchased in the quarter, a typical Q1, Q2 pattern in recent years based on our dividend policy. A small €2,700,000 cash flow deficit in Q2 2019 was mostly due to the timing of tax payments and higher receivables outstanding.
We expect to be cash flow positive again next quarter. Finally, Besi bought about 550,000 shares in the 2nd quarter for a total of €12,700,000 under our current €75,000,000 program. Cumulatively, since program inception last July, we bought a total of 2,400,000 shares at an average price of €20.23 per share for a total of €48,000,000 In addition, Besi entered into an €80,000,000 5 year revolving credit facility at month's end, which can be extended to 6,000,000 and its maturity extended to 7 years. The terms and conditions of the facility provide significant operating flexibility to the company and can be used for working capital and other corporate purposes. We are very pleased to add this flexible financing layer to our capital structure replacing and centralizing various credit facilities at subsidiary levels, which has been a long term objective.
Next, I'd like to speak a little bit about the current market environment. The market downturn, which started for us in the Q2 last year, has extended now for 5 quarters after an extended super cycle in the 20 sixteen-twenty 18 period. At present, VLSI has taken down the 2019 assembly equipment forecast to minus 21% from minus 17 and later a U shape. Excess inventory persists, but and later a U shape. Excess inventory persists, but fortunately global GDP growth is still favorable.
Looking forward, field design now forecasts a more modest rebound in 2020 of 6.6%, growing to 19.1% in 2021. The assembly equipment industry has also been negatively impacted in 20 19 by uncertainty created by U. S.-China trade tensions. During the quarter, we noted significant order weakness from foreign IDMs with operations in China as they reconsider their Asian supply chain strategies and production footprint. Many are now considering or have already acted to move some of their operations out of the country.
For us, the Q2 2019 order decline by foreign IDMs in China was offset by increased business from Chinese and Taiwanese subcontractors adding capacity to satisfy Chinese domestic production requirements. As a result of shifting Asian supply chain dynamics, we decided in Q2 to move some production from Besi's China operations to our principal manufacturing facility in Malaysia. At present, production from our Luzon facility will be used only for Chinese end customers. And now a few words about the outlook for the Q3. Besi estimates that revenue will decrease by approximately 10% versus the Q2 as market weakness extends into the second half of this year, for gross margins to remain in the 55% to 57% range and for operating expenses to reduce further sequentially.
We are very excited about our prospects for the next industry upturn given Besi's performance in the current downturn and a highly scalable production model. In addition, we recognize the stronger secular trends driving our business as advanced packaging becomes an ever more important process in the semiconductor equipment industry. As such, Besi is increasing R and D investment this year for the next generation customer roadmaps and applications to enhance its leadership position. That ends my prepared remarks. I would like to open the call for some questions.
Operator?
The first question is coming from Mr. Mark Hesselink, ING. Go ahead please.
Yes. Thanks for taking the questions. Firstly, on your increased R and D investments, what you're guiding for? And you also mentioned in the press release the promising future for 5 gs and Arm three d, facial recognition, artificial intelligence and a few more. Could you maybe explain a bit like in which of which areas where you see most of the strength coming in the medium term and where you have those extra R and D spending?
My second question would be on the impact from the small shift that you see from your Chinese production towards Malaysia. What kind of impact will it have for you? If I'm correct, your Malaysian facility, I mean, you have a little bit stronger position outside China than you have relative inside China. So what does it do for the overall company?
Well, excellent. First of all, R and D investments. The major investments in any cycle is to further improve the performance of our systems. So every system has a certain cost of ownership and that has to be improved. And you can achieve that by higher speeds, lower costs.
So in the end, roughly 50% of the R and D spend is investment in our current product portfolio. We have 18 platforms, which all need for the next generation better performance, lower cost. The other part is for new developments for new applications, which have not been done in the previous round. And a few buzzwords: number 1, smaller geometries, new materials and they all require smaller geometries, more accurate machines than in the past. And you have to think in different ways in flip chip, in TCB, in hybrid, in system and package, all products used for next generation end applications, partly in the logic arena, so for the high end processors, cloud server world and think about moving from 40 nanometer to 10 nanometer and that has great implications for the interconnect for advanced packaging.
And at the same time, if you look at the communication devices, all kinds of improvements, whether that's in the 3 d face recognition, whether that is in the screen technology, whether the processors. So in all of our major end markets, and not to forget automotive, there's a whole program moving partly the existing portfolios, but at the same time, new developments. And that significantly has increased from the last round, which gives us unique opportunities to further expand our business in the next round. So summarizing abroad, it's not just one application. And I could add to that the success of the last cycle has given us even better opportunities than what we have had in the previous cycle.
So customers have probably some more confidence that we will meet those new specs than they did have in the previous round back in 2014, 2015, 2016. Next question about China to Malaysia. In the past upcycle last peak, roughly 80% of all our systems were built in Malaysia. And the excess of certain systems and that added to about 20% was built in China for mainly Chinese production facilities of non Chinese companies, U. S.
Companies, European companies. So China is a satellite of Malaysia. With the current developments in the world, we have organized to be less dependent upon China if the next round is coming. So when restrictions will be more tight in the years to come, we will be able to support the ramp more out of Malaysia than we did in the last cycle. China is still very key for the Chinese market.
Okay, thanks. Again, maybe a small follow-up on the first part. The fact that you're now increasing the R and D spend right now, can I see that as a bit of an indication that your clients get a bit more comfortable on those new application that they want to speed up that process?
Well, some are being accelerated, because it's a very good question. Technology steps are becoming more and more complicated. So the timing is usually somewhat longer. We've seen that with EUV developments in particular. And the same is then for advanced packaging requirements.
And some have current acceleration, others are according to existing roadmaps related to next technology rounds. So it's a mix.
Okay. Thank you.
The next question comes from Mr. Nigel from Petercampen. Go ahead please.
Hi, good afternoon. Maybe just a quick follow on on the order patterns of IDMs and the situation in China, etcetera. I understand that there's part of the weakness is obviously utilization, etcetera. And in your press release, you've alluded to this. But could you provide a bit more color in terms of what is maybe driven by market weakness and what is driven in terms of uncertainty because of the trade tensions?
And do you see any pent up demand as the dust begins to settle?
Well, that's not an easy question to answer. What we experienced in the past 6 months is that customers are more and more developing plans to be less dependent upon production capacities in China. So there's a natural segregation, you could say, in China for China and more building capacity outside China. However, that takes time because it's not an overnight change. You need people, you need locations, of course, you need a whole production process in place.
But at the same time, we have enjoyed 2 years of upcycle and it's become very clear that there are in many areas significant over capacities in the first place memory, but also for other products. So at this moment, there's a landscape with different developments. And how much is what is hard to tell. At the same time, I should add China is continuing to invest in China for China. And that also offers opportunities.
When the world and that's we mentioned that in the call, the latest VLSI data, but also Gartner has expressed recently their views. This situation is not something you can expect to be resolved in the next quarter. It should lead to a gradual improvement next year and then leading into a stronger development double digit expansion in the year thereafter. Those are the models you hear from our key customers who we visit regularly. And also 2 weeks ago, we had the Semicon West in San Francisco.
After that, we visited several of our major customers as well. So that model is adopted by many at this moment. Automotive is a bit of a surprise. The weakness in automotive that was not expected in that sense, some compared to the situation in 2,009. But on the other hand, cutback in CapEx in the end will always result in again an up cycle.
That's very helpful. Does that answer your question?
Yes, very much. Thanks.
And the next question comes from Mr. Robert Sanders, Deutsche Bank. Go ahead please.
Yes, hi. When you look at the landscape of the microLED players, whether it is Apple on the one hand with their internal development or all the Koreans, how soon do you think this could be ready in terms of going into production, I guess initially with smartwatches, but then with the smartphones? And I guess how large a market do you think this could be for you where it could get into smartphones? I've got a follow-up.
Well, the first and your picture is published broadly. So it's intended that the first application, if microLED flies, should be in smart watches and it's expected that that is 2021, if you read the press articles. So preparation 2020 and rollout 2021. And immediately thereafter then follows the smartphone, high end smartphone market, so 2022. Numbers are always numbers, but this could be a significant additional, let's say, active component in the eyes and smartphones for advanced packaging suppliers like ourselves, because it requires high precision placement, 0.5 micron.
And with certain devices needed to connect, The micro LEDs, you need even to go down to 300, 400 nanometer, that's 0.2, 0.3. So highly specialized, but there's still a long development program, but that's not unusual. So in a long answer, huge potential. If that flies, you can expect higher revenue numbers to satisfy those demands than what has happened in the past. Simply think of an additional component, big component, 25% of the cost of a smartphone, which today advanced packaging is not involved.
Got it. And is it possible then this technology may not use a kind of pick and place approach? Could you use kind of like a silicone stamp? Is there other ways do you think or is it more likely just to play into your kind of core expertise on that? And then I guess my other question would just be on the order run rate.
Are we kind of at the bottom for orders? Is this really just replacement demand plus a few technology buys? Is this really the $80,000,000 a quarter? Is that really the kind of bare minimum? Or is it possible that you could see this order number go lower?
Thanks.
Well, there are 2 questions. The first, as I mentioned in the beginning, with development, there's always a risk. And it's not only our placement, but there's other technologies involved, which also still have to be proven in production environment. So that's always a risk in R and D. Your second question, are we at the bottom?
Well, it looks right now for 3 quarters that this is sort of between the 85% 95% per quarter for us sort of a bottom. Could it go lower? Of course, because we still, as we mentioned, we are in a positive GDP environment. But if that starts to crumble or to stumble, however you want to call it, life can become much worse. Our breakeven levels are at around €50,000,000 €52,000,000 per quarter.
We certainly have additional cost cutting measures, which we can quickly, let's say, put into progress. So we're well prepared for any further leg down. So I'm the last to say this is the start of the next upcycle. It is pretty uncertain.
Okay. Thank you.
Mr. Blickman, there seems to be no further questions.
Then I thank everyone to attend this call. And in case you have any further questions, don't hesitate to contact us. All right.