Good morning, good afternoon, ladies and gentlemen, welcome to today's quarterly conference call and audio webcast to discuss the company's 2018 first quarter results. You can log in to the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer, and Mr. Cor te Hennepe, Senior Vice President of 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. 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, 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 first quarter ended March 31st, also spend time updating you on the market, our strategy, and outlook. First, some overall thoughts on the year and Q1 results. Besi's Q1 2018 results were in line with guidance and were positively influenced by a continuation of many favorable trends from 2017.
Our financial performance benefited from an extended industry upturn, ongoing customer investments in advanced packaging applications, and Besi's strong market position with key customers and supply chains. As such, revenue and net income increased by 40.5% and 52.7% respectively versus the first quarter of last year. Q1 2018 orders also grew by a strong 37.8% versus Q4 2017 to reach EUR 205.8 million due primarily to capacity additions for smartphone applications, both IDMs and Asian subcontractors. First quarter 2018 orders declined by 14.2%, however, versus exceptionally strong levels recorded in the first quarter of last year. In addition, Q1 '18 growth and net margins showed further steady improvement due to increased production efficiencies and strategic execution of cost reduction initiatives despite adverse influences from the 13.5% average year-over-year decline of the US dollar versus the euro.
Besi's strong year-over-year revenue growth reflects a broad-based demand across our die attach and packaging portfolio and was slightly above the midpoint of guidance. In addition, it reflected increased demand by Asian customers for smartphone and high-performance computing applications and by North American and European IDMs for automotive and cloud server applications. Similarly, net income increased by EUR 12.8 million or 52.7%, and net margins rose 1.9% to 23.9%. Continued revenue and gross margin improvement more than offset higher operating expenses related to variable compensation and build-out of our Asian infrastructure. In fact, baseline OPEX increased by only 1.6% sequentially, highlighting our careful overhead management. Quarterly sequential profit comparisons versus Q1 are highly influenced by the level of variable compensation in each quarter.
As such, reported first quarter 2018 profit levels declined by EUR 6.5 million versus Q4 2017 due to a EUR 5.6 million sequential increase in variable compensation as well as a 5.7 point increase in our effective tax rate to 16.3% as the majority of such expenses are not tax-deductible. Excluding such efforts, net income declined by less than EUR 1 million between the two quarters. Similarly, net margins on this basis declined slightly from 31% to 30.1% sequentially and have exceeded 30% net for the past four quarters, underscoring the successful execution of our business strategy. Besi's cash generation was again strong in the first quarter of 2018, with net cash and deposits expanding to EUR 290.1 million, an increase of EUR 42.5 million, or 17.2%, versus the fourth quarter of last year, and EUR 113.4 million, or 65.1%, versus the first quarter of last year.
We utilized EUR 6 million of excess cash flow this quarter to enhance shareholder value via regular share repurchases activities. At quarter end, the current 1 million buyback share program was about 70% complete, with cumulative purchases totaling EUR 32.4 million at an average price of EUR 47.78. Besi's capital allocation policy seeks to provide a fair return to shareholders in form of cash dividends and share repurchases while retaining a capital base sufficient to fund future growth opportunities. Since 2011, we have made distribution of EUR 454.9 million, including the 2017 dividend and share purchases to date in 2018. Further, our dividend yield continues to greatly exceed those of our peers, and you see in the accompanying chart.
Earlier today, we hosted our 2017 AGM, at which all agenda items were approved, including a two-for-one stock split of Besi's ordinary shares in light of the almost 1,400% increase in our stock price since 2013. In this way, we hope to increase the liquidity and affordability of Besi stock for both retail and institutional investors. In addition, Mr. Niek Hoek and Mr. Carlo Bozotti were appointed as new members of the Supervisory Board. Niek will replace Jan Vaandrager, who is retiring after nine years of service. Post his retirement from STMicroelectronics, Carlo will join in July, and the board will temporarily expand to six members for this year. Now, I'd like to update you on our strategy, the market, and our guidance for the second quarter.
One of the keys to Besi's success in recent years has been a disciplined focus on executing strategic initiatives to increase our technological advantage, addressable market, and market penetration, all while continuing to reduce structural cost and increase efficiency in a cyclical industry. Our 2018 strategic focus centers on the further build-out of our Asian infrastructure, with a particular emphasis on Singapore sales and development support and the expansion of Besi's China production facilities. Towards these ends, we will continue to transfer of certain development, sales, service, and admin personnel functions from Europe to Singapore this year. Similarly, we have started initial production of packaging systems and additional die bonder systems in China and have recently completed the Luxium capacity expansion, which we highlighted last quarter.
In this way, we aim to further optimize our Asian production and supply chain models and increase Besi's penetration of the emerging Chinese semiconductor market. A couple of words about the assembly equipment market and our second quarter guidance. As seen on this next chart, industry analysts continue to expect assembly equipment market growth into 2018. However, subsequent to quarter end, VLSI Research downwardly revised the 2018 market growth estimate from 18.1% in January to 12.5% based on announcement by several semiconductor manufacturers indicating a softening of demand for 2017. For the second quarter 2018, we estimate that Besi's revenue will grow by 10%-15% versus the first quarter, and that H1-2018 revenue will rise by approximately 17% versus H1-2017, at the midpoint of the second quarter 2018 revenue guidance.
We also anticipate that gross margins should remain strong with a range of 55%-57% in the second quarter. Such guidance implies a gross margin range of approximately 56%-57% for the first half year 2018 versus 56.7% for the first half of 2017. Further, we guide that Q2 OPEX should decrease by 5%-10% versus the first quarter levels, due primarily to reduced variable compensation expense. As a result, we expect significantly higher operating profit, both on a sequential quarterly and also half-year comparable basis. That ends my prepared remarks. I would like to open the floor now for some questions. Operator?
Thank you, sir. Ladies and gentlemen, we will start the question and answer session now. To be registered for the question and answer queue, please press star one on your telephone. Star one for any questions or remarks. The first question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead, please, sir.
Good afternoon, gentlemen. A couple of questions from my side. Maybe best you take them one by one. Starting with the sales outlook. When I look at your sales guidance for Q2, it's a bit lower than the backlog at the start of the quarter. Is that because some of the capacity expansion in smartphone will take place later in the year than what we typically see? Is it in other markets where you see some clients asking for shipment in H2 rather than in Q2?
Well, there is no quarter ever that all the backlog is delivered in the next quarter. It is a mix of partly orders out of backlog plus new orders received in the first part of the quarter. Yes, we have orders for Q3 early. That is what it is.
There are no specific end markets. Where are these orders for H2 relating? It's for several end markets.
Yes, across the board.
Okay. That's fair. To follow up on the VLSI forecast and the read-back into that forecast that you referred to based on the discussions you have with clients, do you also sense that they've become a bit more cautious on their spending intention, therefore, you agree with the more cautious outlook of VLSI? Or do you sense that clients are still optimistic and have not really changed their minds?
Well, in this world, you can look forward about one quarter, three months visibility, and that has not changed. None of our customers are able to give you a precise forecast further out. If you look back to VLSI's reliability in forecasting, that also reflects the uncertainties in the end market. There have been both adjusting upwards or downwards during every year. Today, we see many companies reporting. Some are reporting cautiously, others are reporting very positively. It's a mixed landscape. But still, how many years have we had growth over 10% in two years sequentially? The better question is, how far will this upturn last? The stock market is right. Besi's value evaporated nearly by 20% today. In the past four days, close to 30%. Shareholders are always right. Who are we to say that it is not right?
Well, I'm not suggesting you should say so. I was just wondering whether you recognize what VLSI is saying, but it seems your views are aligned with theirs in that sense.
No, our views are irrelevant. We live by orders day by day. The best we can forecast for Q2 is what we have guided, and that's it.
Okay. Maybe specific question on your exposure to the smartphone market. I think in the Q4 call, you indicated that the expectation was that additional players beyond Apple would adopt 3D sensing. Do you still see other players adopting 3D sensing this year? To what extent has the timing and the potential size of that adoption changed since the beginning of the year?
Well, we have not released any specific guidance about any component in smartphones. If you look back in 2017, but that is true for every year, the most difficult product to forecast are the smartphones since the first phones, because it is highly dependent upon retail end markets. Last year, if you look at all of our quarterly press releases and conference calls, we have not been able to give you any stronger guidance than what we have done per quarter, and we are able to adjust to any change in demand, whether that is up or whether that is down. We have demonstrated 60% increase quarter-over-quarter, but also we have had slower quarters. If you simply look at the revenue per quarter. It is fluctuating. Last year's peak was Q2 in revenue.
This year, we may well exceed second quarter revenue compared to second quarter last year. What will happen in Q3 and Q4, nobody knows. Last year also, the orders for Q3 and Q4 mostly come in the quarter preceding that quarter. That is as good as it gets.
Okay. That is helpful. A final question from me. One of your competitors, ASM Pacific Technology, last week, talked about having issues with component supply. Is that also something you have been facing, or have you been able to secure components?
So far, we are certainly able to secure components. If that would have been the case, any shortage, we would have mentioned.
Okay. That's clear. Thank you.
The next question is from Mr. Michael from Van Lanschot Kempen. Go ahead, please, sir.
Hi. Good afternoon. I want to discuss maybe some other parts of the business, specifically, if I take the pie chart, there's also a huge server and computing part, and about others. Could you maybe give us a bit more indication or an impression on how those markets are evolving this year, at least qualitatively?
So far, they are developing above expectation. That's not difficult to imagine. If you look at first half year 2017, first half year 2018 guidance, you will see a growth. If the other data points of the smartphone worlds are correct, you can easily understand that the other two are doing very well.
Got it. Maybe a follow-up on this, because if I remember correctly, these businesses are a bit less seasonal. Does that imply, and again, without quantifying it, that also for the second half of the year, we should perhaps see continued order activity?
Well, so far that looks intact. If you follow the major end customers and their releases, that should be the case. Also here, the market is volatile.
Yeah.
It's too early to tell. You have one quarter visibility. You may derive from VLSI, still double-digit forecast growth, that certainly those end markets are in good shape.
Good. Thank you. Perhaps more geographically, you talked about the China infrastructure being built up again this year further. Just in terms on the sales outlook or penetration or your activities there, do you see continued growth there? Is there anything specific or not specific, but just a general sentiment you can share with us?
Well, first of all, as a point of note, Q1 revenue, 40% was directly to China. If you remember, in the past three, four years, that came from below 30% to now 40%. Besi's position in the major higher-end Chinese customers is increasing step-by-step, year-by-year. We've indicated that some of our peers, competitors, it's about 50/50, but more towards the low end. Besi is very successful in the higher end. Our strategy in building our infrastructure has worked so far very well. Look at our margins, also very well. That trend will continue.
Got it. Thank you very much.
Ladies and gentlemen, for any additional question, please press star 1. Go ahead, please. There were no further question. I hand over the conference to you, Mr. Blickman. Go ahead, please, sir.
Well, thank you all for taking the time to listen to this call. If you have any further questions, don't hesitate to contact us. Bye-bye.
Ladies and gentlemen, this concludes the Besi conference call. You may now disconnect your line. Have a nice day.