Good morning, good afternoon, ladies and gentlemen, and welcome to the BC's quarterly conference call and audio webcast to discuss the company's 2017 Third Quarter 9 Months Results. The audio webcast is available on BC's website, www.bc.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer and Mr. Kort Tejenepe, 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 Pickman.
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 and then take questions. I would like to remind 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 and update you on the market strategic initiatives and the outlook. First, some overall thoughts on the past quarter 9 months. Besi's financial performance continued to improve in the Q3, underscoring the strength and market position of our advanced packaging portfolio and the achievements of new benchmark levels of revenue and net income. For the quarter, revenue and net income reached €159,300,000 €52,900,000 respectively, up 68.9 percent and 2 19% versus the Q3 last year. Similarly, for the 9 months ended September 30, Besi's revenue and net income reached €439 point €5,000,000 €129,600,000 respectively, up 55.7 percent and 167% versus the year to date period last year.
The 9 month 2017 net income levels was almost double that recorded for the whole of 2016. Orders for semiconductor assembly equipment continued to develop positively in the Q3, reflecting an uptrend, which first commenced in the second half of last year. Besi's orders grew strongly, reaching €161,500,000 in the 3rd quarter €531,500,000 for the 1st 9 months of 2017, representing increases of 107% and 88.2%, respectively, versus the comparable periods of last year. In a quarter typically weaker than the Q2, Q3 2017 orders actually grew sequentially by 24.1% versus the Q2, primarily due to increased orders from Asian subcontractors for high end computing and mobile applications and renewed capacity purchases by IDMs for advanced mobile applications. In general, our orders grew this year our order growth this year has reflected market share gains as well as continued benefits from a new technology upgrade cycle, wherein customers are significantly building out their advanced packaging capacity for leading edge smartphone, automotive, cloud server, memory and computing applications.
Market growth in 2017 has also been driven by new device introductions, many of which require new investments in assembly equipment. Cash flow generation has also increased in 2017 with net cash and deposits at the end of the third quarter reaching 25.4 percent increase versus the end of the Q3 last year, despite the return to shareholders of €82,500,000 so far this year in the form of dividends and share repurchases. The efficiency of Besi's operations has also improved this year. In the Q3, gross margins and net margins reached new industry benchmark versus peers of 58.7% and 33.2%, respectively. Similarly, gross margin and net margins rose to 57.4% and 29.5%, respectively, for the 1st 9 months of this year.
Enhanced margin levels reflect Besi's strong technology position, successful optimization of our Asian production strategy and ongoing realization of cost control initiatives. With that, I'll turn the presentation over to Cor.
Okay. Thank you,
Richard. Besi's 6.3% sequential revenue decline followed typical seasonal patterns and was within prior guidance of down 5% to 15%. The strong year over year comparisons reflect the ongoing industry upturn as well as increased market share in our addressable assembly equipment markets. Besi revenue and order growth this year is also coming from increased customer demand for advanced packaging capacity from well established process technologies and not from emerging technologies such as fan out wave level processing or TCB. Per customer type, IDM and subcontractor orders represented 55% 45%, respectively, of total Q3 'seventeen bookings, which were 69% and 31%, respectively, of Besi's total year to date 'seventeen orders due to strong demand by IDMs and their respective supply chains this year for advanced packaging capacity.
Base's gross margin of 58.7 percent in Q3 'seventeen increased by 1.4 points versus Q2 'seventeen despite the 6.3% sequential revenue decline and by 8.2 points versus Q3 'sixteen. Continued gross margin improvement this year is primarily due to our market position and value proposition to customers as well as production efficiencies realized from the successful scaling of our Asian production capacity. These favorable influences overcame a 9.1% average decline in the U. S. Dollar versus the euro since the start of 2017.
Q3 'seventeen OpEx decreased by €3,700,000 or 11% versus Q2 'seventeen and was slightly better than prior guidance of a 5% to 10% decline. As a percentage of revenue, OpEx decreased to 19% versus 20% last quarter and 30% last year. Similarly, baseline OpEx in Q3 2017 decreased by 8.8% sequentially to €27,000,000 and has stayed within the range of €25,000,000 to €30,000,000 this year despite Besi's significant revenue growth. Operating expense growth in the Q3 year 9 month year over year comparisons was primarily associated with higher personnel and variable sales related expenses to support our revenue ramp this year. Q3 2017 net income of €52,900,000 increased by €500,000 or 1 percent versus Q2 'seventeen and by €36,000,000 or 2 90 percent versus Q3 'sixteen.
Sequentially, net income grew principally as a result of continued gross margin improvement, cost control efforts and a lower effective tax rate. Besi's 9 month 2017 growth of 167% versus 2016 reflected many of the same factors. Our effective tax rate has varied on a quarterly basis, but has ranged between 10% 50% as per guidance at the start of the year. Our liquidity position continues to build nicely, which accommodates shareholder friendly capital allocation policy. At the end of Q3 'seventeen, Besi's cash and deposits aggregated €298,000,000 and net cash and deposits increased by €34,000,000 versus Q2 'seventeen to reach €165,400,000 Similarly, net cash and deposits increased by €33,500,000 or 25.4 percent versus Q3 'sixteen.
Regular share repurchases continued during the quarter, resulting in a total of 522,000 shares repurchased since program inception through quarter end for a total of €21,000,000 This compares with a total of 1,000,000 shares repurchased on the Besi's prior program, which expired on October 20, 2016, for a total of €22,500,000 Bayview has extended the current €1,000,000 share repurchase program until October 30, 2018. And with that, I'll turn the presentation back over to Richard.
Thanks, Cor. Now I'd like to update you on our strategy, the market and the guidance for the Q4. The disciplined execution of our product strategy, combined with focused initiatives to reduce structural costs, has contributed to Besi's success in recent years. Favorable momentum has continued into 2017, where we have experienced a further expansion of our revenue and profit potential along with an increase in the share of our addressable markets to approximately 38% using current VLSI estimates. Another key to success has been the announced scalability of our production capacity via expanded Asian production and supply chain capabilities and a reduction of customer lead times.
This year Besi has increased production capacity to an annualized run rate of €600,000,000 with minimal additional CapEx. Starting in Q4, Besi will invest approximately €4,500,000 in our Lhasan, China facility, consistent with government plans to increase local production over the next 5 years. We anticipate total Asian production investments of about €6,000,000 to accommodate potential revenue growth 30% to 40% above current levels. In addition, we continue to pursue revenue and cost initiative established in the Q4 2016 to increase Besi's addressable market share, reduce structural costs including further reductions to European overhead and to accelerate common platform developments. These actions will help drive current business momentum into the future.
We'd also like to highlight some of the strategic progress we've made to improve Besi's cash flow generation, which helps support organic growth and our capital allocation policy. In this regard, we've almost doubled our inventory turnover ratio over the past 5 years and similarly reduced our cash conversion cycle by half. We've achieved these results through constant attention on a weekly basis to inventory levels relative to projected order rates and some specific initiatives such as the qualification, expansion and consolidation of our Asian supply chain and centralized management of global spares activities. Now a few words about the assembly markets and our Q4 guidance. At present, the industry environment remains positive with ongoing customer investment in a new technology upgrade cycle and specific applications such as smartphones, automotive, cloud server and high end memory.
VLSI recently upgraded its 2017 equipment assembly equipment market growth rate to 23%, up from 12% in May and 9% at the start of the year. It currently forecasts growth to continue into 2018 with an estimated growth rate of 5%. Our 4th quarter guidance calls for revenue to decrease by 0% to 10% versus the Q3, consistent with seasonal trends with gross margins anticipated to range between 55% 57% assuming current ForEx rates. In addition, OpEx should increase by 5% to 10% 1st to 3rd quarter, mostly due to higher projected development spending. The midpoint of Q4 'seventeen guidance indicates that Besi will post a strong revenue and operating income growth versus the Q4 last year.
That ends my prepared remarks. I would like to open the call now for some questions. Operator?
And the first question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead please.
Good afternoon, gentlemen. A couple of questions from my side. Maybe first on some of your end markets, starting with automotive. Looking at the automotive market, we see some structural trends and drivers like advanced driver assistance, electrification, etcetera. So I was wondering whether you already have some visibility on further capacity build outs in that particular market for next year and what that would mean for equipment spending?
And then related to cloud server, could you shed some light on what type of chips your machines are used for? Is that hybrid memory? Or what kind of products should I think of? Thank you.
Mr. Holt. Oh, Peter, you had 3 questions. I noted 2. But anyway, let me answer the first.
Automotive expansion and what do we see in 2018? First of all, yes, there is a significant capacity expansion underway and also with new devices, which are part of either next generation cars in general, but also hybrid cars and also electrical cars. And that is always in automotive, a longer term investment than, for instance, for smartphones. And automotive has a longer production cycle and qualification cycle. So we can well look into the first half of next year already.
And all the major electronics companies in that space are investing in new products and also capacity expansions. For Besi, around 20% of our revenue is in automotive historically ranging between 15% 20%. In a similar basis, this will is expected to remain going forward. So that's a very positive driver. Cloud Server, we are invested in many technologies in the processors, in the memory part of the servers and also specific logics in that space.
So on a broader scale, we have a very consistent market position in that space, and that's usually around 25% of our revenue. Also this year, it has grown very much in line with the historical percentages.
Okay. And then maybe to clarify then on memory. If I understand correctly, some of the more mainstream memory products are still using wire bonding. So your exposure to memory that is mostly these type of hybrid memories that use TSV technology?
Well, no, that's the very high end, and that's still a fraction of the volume. You have to think more in die attached products using wirebond and also certain flip chip, also stacked memory devices. So there's a whole range. And the TCB arena is only the very high end, which is still in early stages.
Okay. So but it means that your exposure to memory, it's quite broad? Yes. Yes.
Okay. And as a percentage of revenue, I should add to that. We have never had market shares in our total revenue of more than 15% in memory. And at this moment, it is not above that percentage. Memory is a very, very cyclical part of this industry.
It's very cost related as opposed to the logic part of the business. So you have to be careful in memory.
Okay. Then my final question that relates to your top line clearly outperforming the industry growth.
So I
was curious whether you have a clear idea in which parts of the market or which products you're clearly gaining market share. Are there some products that clearly stand out there?
No, it's actually across the board. It is in die attach. It is in packaging. Plating has a very strong investment cycle. So but that also ties to the gross margin development.
If it would only be one of our products, it would not reach those levels. So Asia is benefiting from a very successful product mix in the current upcycle. Okay. That's helpful. Thank you.
The next question is from Mr. Robert Sanders, Deutsche Bank. Go ahead please.
Yes. Hi. Congrats on the quarter. I just had a quick question about, again, coming back to TSC chip on wafer and substrate, these trends. I know they represent a small proportion of your revenue, but have you seen any meaningful in the past you've said that these markets are relatively nascent and not really and quite cost prohibitive in many cases.
Have you seen any change in the environment whether it's the TSV, COWAS info that has been perhaps been a contributing factor to your orders?
No. If you look at current product mix and revenue development over the past quarters, Last year and in 2015, we had certain investment rounds for TCB TSC and also for fan out wafer level. And this year, it is far less, I would say. So the growth is coming from the current technology applications using substrates and in automotive also lead frames. So one would expect that that is probably in the next round more important.
There is continued investment from the leaders in those new areas. But the big growth, the volume growth is not coming from those applications. Yes.
Got it. And when you look at the market into next year, when you split between the OSATs, the CouplerFoundries and the IDMs. How would you compare your growth prospects across those sort of 3 customer segments given what you're I assume you can probably see in terms of utilizations. In fact, some of the OSATs have reported quite lackluster numbers of late.
Yes. What's interesting is but that is also history repeats itself. The key drivers for any new upcycle are always the IDMs. And certain IDMs, especially the fabless, they use more subcontractors. But the big ones who are moving the needle, you see also contrary development where there's more in house advanced packaging and assembly as opposed to outsourcing, probably because of the complexity, the CapEx involved, the critical nature of the specific end products.
So that's why you've seen with us the percentage of IDM versus subcomm move more towards the IDMs, but it's probably at some point going again more towards the outsourcing because that gives a higher flexibility. But that's our read of how things are happening.
Got it. And just last question would just be in terms of those IDMs, which it sounds like they're quite broad based across automotive and logic and everything else. Given that those companies would rather do stuff in house use an OSAT or you call it subcon, I assume that's presume that's because they are in the kind of system business and they have specific needs that they can that they would prefer to address them to rely on the 3rd party. So does that mean then that their requirements are more stringent and their demands on you are therefore higher and therefore your margins are higher with IDMs than versus subcons?
In some cases that probably is a good read. But because there are so many different package types, with some you need far more development and that can have a negative impact on the gross margins. So it's hard to give an average And also the in the first round of new technology rollout, there are many unknowns. There are still choices to be made on design specifics, also on materials. And that usually has a negative impact on the gross margin.
Once it's all clear and it's also rolled out to the Subcon or OSAT world, that is more predictable. But we have over the years extended our support in the early stages also out of Singapore with our design center and process development capabilities to address these 1st round critical developments much closer to the end customers and that has increased the predictability. So yes, gross margins you would expect to be higher in the IDM world. But with the risks and the uncertainties, historically, there also have been many unknowns, which then have a negative effect on the gross margins.
Just last follow on from that and otherwise I'll jump back in the queue. But in terms of what the largest logic IDM is talking about in terms of splitting up dies, in terms of creating modules of dies at multiple process geometries, because they see the cost of that as being less than the cost of shrinking given the high cost of things like EUV. If that trend plays out as a global trend, and I would imagine Intel tends to lead the industry in this kind of thing, Would that be great for a lot of your business or just the die bonding business? Or if you can just characterize that and how that meaningful that would be if that became a megatrend?
That's extremely positive for us because the critical nature of assembly, die attach, die placement and subsequently the packaging requirements for that are exactly into our advanced packaging strategy. And currently, we are very successful at that. So that trend we have anticipated and that's widely publicized. That is, from a cost point of view, also very much advantageous because the very high end using wafer level is still a very expensive way of providing interconnect solutions. So being active on both technologies at the forefront with the winners in this industry is very beneficial.
Got it. So this multi die trend could actually be more meaningful than TSV and all
of that, itself? Well, maybe it will be a mix, because there's not one you have to see this world as an ever growing amount of different dies in different application, in different technologies being the interconnect between the chip and an end application. So there is not going to be one final solution.
The next question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead please.
Yes. I had two follow ups on the outlook for Q4. Maybe first for Kare. Can you explain why OpEx is expected to be up while you're guiding for sales to be flat to down? And then on the sales guidance, if I take the low point of the range, it's €143,000,000 That looks quite conservative given your backlog of 168,000,000 euros So trying to understand the moving parts there.
Is that entirely related to timing of your customers? Or are your lead times also playing a role there? And if you're able to reduce them, there might be some upside there?
Okay. Well, if I look at
OpEx, that's very much related to a technicality under IFRS. We have to build up a provision for holidays that are built up by our people. And Q3 is typically the quarter that's especially in Europe, everybody takes this holiday and then you book a release of this provision. And that has every Q3, we see that's a normal pattern that has a lowering effect on our OpEx. And that's, of course, in Q4, we start to build up again.
So that's the main reason for this increase. And the other increases are a bit across the board, bits and pieces. But this technicality, this, let's say, seasonal technicality is the main driver here. Looking at sales and backlog, we always give a range, of course. Backlog is very much depending on planning of the customer.
If you look at our ability to reach a quarter before that, dollars 170,000,000 we could basically deliver the whole backlog, which we are depending on the planning of customers there. So if the planning would be beneficial, that could help. But as we always have to take into consideration a range because the quarters are usually back loaded. So at the end of the quarter, a lot is happening. And that's why we work with ranges.
But it's very much depending on the timing of our customer.
Okay. That's very clear. Then the final question from my side that relates to the plating business, where you're working on a solution for the solar market, where copper offers some cost benefits. Could you tell a bit more on what that means for the lifetime of these solar panels and whether there have already been some results from the test that your clients are doing in that field?
Yes. There are some positive developments to note. We have received certain upgrade kits for the systems installed in the field. We've added another customer who is investing in plating solar cells with our technology. So there's a positive movement again.
But still in the early days and the major uptick in Plating Systems is again in the semiconductor arena, where we are at this moment involved in a very positive expansion and also the upgrading of the existing plating lines in the field. But solar is moving in the right direction.
And by adding a new customer, you now have 3 in this
field? 3 major ones. And we have many who are testing this in laboratory environment.
Okay. So the
Close to 10.
So the opportunity is only 10 bigger then?
Yes. Okay. Yes. Thank you.
There are no further questions, Mr. Dickmann.
Okay. Thank you all very much for listening in to the call and also your questions. And if you have any further questions, please contact us. Bye bye.
Ladies and gentlemen, this concludes the Besi's event call. Thank you for attending. You may now disconnect your line. Have a nice day.