Good morning. Good afternoon, ladies and gentlemen, and welcome to the Basic's Quarterly Conference Call and Audio Webcasts to discuss the company's 2018 Q1 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.
Pore Te Henneker, Senior Vice President of 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 reconfirmation 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 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 Q1 ended March 31 and 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 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 Q1 of last year.
Q1 2018 orders also grew by a strong 37.8% versus Q4 2017 to reach €205,800,000 due primarily to capacity additions for smartphone applications both REMS and Asian subcontractors. Q1 2018 orders declined by 14.2%, however, versus exceptionally strong levels recorded in the Q1 of last year. In addition, Q1 2018 gross 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 U. S. Dollar versus the euro.
Besi's strong year over year revenue growth reflects broad based demand across our diarforming 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 our North American and European IDMs for automotive and cloud server applications. Similarly, net income increased by €12,800,000 or 50 8.7 percent and net margin rose 1.9% to 23.9 percent. Continued revenue and gross margin improvement more than offset higher operating expenses related to variable compensation and build up of our agent 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 Q1 2018 profit levels declined by $6,500,000 versus Q4 20 17 due to a $5,600,000 sequential increase in variable compensation as well as a 5.7 percent 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 $1,000,000 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 4 quarters underscoring the successful execution of our business strategy. Besi's cash generation was again strong in the Q1 of 2018 with net cash and deposits expanding to €290,100,000 an increase of €42,500,000 or 17.2 percent versus the Q4 of last year and EUR113,400,000 or 65.1 percent versus the Q1 of last year.
We utilized EUR 6,000,000 of excess cash flow this quarter to announce shareholder value via regular share repurchases activities. At quarter end, the current €1,000,000 buyback share program was about 70% complete with cumulative purchases totaling €32,400,000 at an average price of €47,780 Besi's capital allocation policy seeks to provide a current 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 €454,900,000 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 2 for 1 stock split of Besi's ordinary shares in light of the almost 1400% increase in our stock price since 2 1,030.
In this way, we hope to increase the liquidity and affordability of basic stock for both retail and institutional investors. In addition, Mr. Nick Hook and Mr. Carlo Bosotti were appointed as new members of the Supervisory Board. Nick will replace Jan van der Aachen on his retiring after 9 years of service.
Post his retirement from STMicroelectronics, Carlo will join in July and the Board will temporarily exceed temporarily expand to 6 members for this year. Now I'd like to update you on our strategy, the market and our guidance for the Q2. 1 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 Beijing'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 dry bomber systems in China and have recently completed the Lusan capacity expansion, which we highlighted last quarter. In this way, we aim to further optimize our Asian production and supply chain models and increase basis penetration of the emerging Chinese semiconductor market. Now a couple of words about the assembly equipment market and our Q2 guidance. As seen on this next chart, industry analysts continue to expect assembly equipment market growth into 2018. However, subsequent to quarter end, Filus and Research downwardly revised the 2018 market growth estimate from 18.1% in January to 12.5% based on announcement several semiconductor manufacturers indicating a softening of demand trends for 2017.
For the Q2 2018, we estimate that basic revenue will grow by 10% to 15% versus the Q1 and that H1 2018 revenue will rise by approximately 17% versus H1 2017 at the midpoint of the Q2 2018 revenue guidance. We also anticipate that gross margins should remain strong with a range of 55% to 57% in the second quarter. Such guidance implies a gross margin range of approximately 56% to 57% for the first half year twenty eighteen versus 56.7% for the first half of twenty seventeen. Further, we guide that Q2 OpEx should decrease by 5% to 10 percent versus the Q1 levels due primarily to reduce 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 call now for some questions. Operator?
Thank you, sir. 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 just you take them 1 by 1. Starting to see 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 later in the year than what we typically see?
Or 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. So it is a mix of partly orders out of backlog plus new orders received in the 1st part of the quarter. So yes, we have orders for Q3 early. So that is what it is.
But there are no specific end markets. Where these orders for H2 relate to? It's for several markets.
Yes, across the board.
Okay. That's fair. Then a follow-up on the VSI forecast and the reduction to that forecast that you referred to. Based on the discussions you have with clients, do you also say that they've become a bit more cautious on their spending? And therefore, you agree with the more cautious outlook of VSI?
Or do you think that clients are still optimistic and have not really changed their minds?
Well, in this world, you can look forward about 1 quarter, 3 months visibility. And that has not changed. So none of our customers are able to give you a precise forecast for out. If you look back to Filizares reliability and forecasting, that also reflects the uncertainties in the end market. They have been both investing upwards or downwards during every year.
So 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 2 years sequentially. So a better question is, how far will this upturn last? And the stock market is right, Besi's value evaporated nearly by 20% today in the past 4 days, close to 30%.
So shareholders are always right. So who are we to say that that is not right?
Well, I'm not suggesting you should say so. I was just wondering whether you recognize what figures are you assessing? But it seems your views are aligned with theirs in that sense?
No. Our views are irrelevant. We live by orders day by day. And the best we can forecast for Q2 is what we have guided, and that's it.
Okay. Then 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 3 d sensing. Do you still see other players adopting 3 d sensing this year? And to what extent has the timing and the potential size of that adoption changed since the beginning of the year?
We have not released any specific guidance about any component in smartphones. Also, 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's highly dependent upon retail end markets. So also 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've had slower quarters. So 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 2nd quarter revenue compared to Q2 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.
And that's as good as it gets.
Okay. That's helpful. And then final question for me. 1 of your competitors, Asia Pacific, last week talks about having issues with component supply. Is that also something you would be facing?
Or have you been unable to secure components?
So far, we are certainly able to secure components. If that would have been the case, a shortage we would have mentioned.
Okay. That's it. Thank you.
The next question is from Vincent Aygo from Putten Keesen. Go ahead please sir.
Hi, good afternoon. I want to discuss maybe some other parts of the business, specifically the big pie chart, but also the huge server and computing part and developers. 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. And that's not easy that's not difficult to imagine. If you look at first half year 2017, first half year 2018 guidance, then you will see a growth. And if the other data points of the smartphone worlds are correct, you can easily understand that the other 2 are doing very well.
Got it. And then maybe a follow-up on this. 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. And if you follow the major end customers and their releases, that should be against, but also here the market is volatile. It's too early to tell. You have 1 quarter visibility. But you may derive from VLSI, still double digit forecast growth.
But certainly those end markets are in good shape.
Good. Thank you. And then 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. And if you remember in the past 3, 4 years that came from below 30% to now 40%. So 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 fifty-fifty, but more towards the low end. Besi is very successful in the higher end and the higher end.
So our strategy in building infrastructure has worked so far very well. Look at our margins also very well and that is the trend will continue.
Got it. Thank you very much.
There are no further questions. 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. And if you have any further questions, don't hesitate to contact us. Bye bye.
Ladies and gentlemen, this concludes the SEC conference call. You may disconnect your line. Have a nice day.