Good morning, good afternoon, ladies and gentlemen, welcome to the Besi quarterly conference call and audio webcast to discuss the company's 2017 second quarter results. The audio webcast is available on Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer, and Mr. Cor te Hennepe, Senior Vice President, Finance. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, instructions will follow at that time. As a reminder, ladies and gentlemen, this conference is being recorded cannot be reproduced in whole or in part without written permission from the company. I would 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 issued earlier today, then take your questions. I would like to remind everyone 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 the second quarter and first half year, also spend some time updating you on the market, our strategy, and outlook. First, some overall thoughts on the past quarter and first half year.
Besi's second quarter and first half 2017 performance substantially exceeded comparable prior year results due to ongoing strength in the assembly equipment industry this year, market share gains by our advanced packaging portfolio, the increased efficiency and scalability of our business model. First half revenue of EUR 280.2 million and orders of EUR 369.9 million rose by 49% and 81% respectively, reflecting a strong customer build out of advanced packaging capacity in 2017 for leading-edge smartphone, automotive, and cloud server applications. First-half net income of EUR 76.7 million rose by 140% versus the first half of last year exceeded by 17.5% our net income for all of 2016. Similarly, net margins expanded from 17% in the first half of last year to 27.4% in the first half of this year, as a result of higher gross margins, combined with a tight control of fixed cost overhead development.
Besi's second quarter results were also strong as we posted revenue of EUR 170 million and a net income of EUR 52.4 million, which were up 56% and 118%, respectively, year-over-year. Growth exceeded expectations primarily due to earlier than anticipated customer deliveries of certain die bonding systems originally scheduled for the third quarter. In addition, orders grew by a healthy 29.5% versus the second quarter of last year as customers increased demand for a broad array of Besi's die bonding, packaging, and plating systems serving multiple end-user markets. Operating profit growth also exceeded expectations as gross margins reached 57.3%, while fixed cost development was well contained. As such, Besi's net margin reached 30.8%, the first time we have crossed that profitability threshold.
In addition, net cash and deposits increased by EUR 20.8 million or 18.8% versus second quarter 2016, despite the working capital required to support our large revenue ramp and increased dividend payments. With that, I'll turn the call over to Cor.
Thank you, Richard. Besi's Q2 '17 revenue increased by 54.3% and 56% versus Q1 '17 and Q2 '16 respectively. Growth was primarily due to a more favorable industry environment and a significant expansion by IDMs and their respective supply chains of die bonding capacity for next-generation mobile devices with enhanced features. In addition, Besi experienced broad-based growth for automotive and high-end cloud server applications. Orders of EUR 130 million were down sequentially by 45.7% versus Q1 '17 as customers scaled back demand for next-generation mobile devices after the large Q1 '17 capacity build. Still, Q2 '17's orders grew by EUR 29.6 million over Q2 '16, reflecting broad-based growth across Besi's portfolio for a variety of end-user markets, with a particular emphasis on die bonding systems for cloud server and automotive applications. Per customer type, IDM and subcontractor orders represented 64% and 36% respectively of total Q2 '17 bookings.
Percentage most likely will return to the more typical 60/40, 50/50 split in subsequent quarters. Besi's gross margin of 57.3% in Q2 '17 increased by 1.6 points versus Q1 '17 and exceeded prior guidance of 54%-56%. Sequential gross margin improvement was mostly due to increased labor efficiencies and a more favorable product mix. Interestingly, we achieved higher sequential gross margins despite adverse Forex influences from the decrease in the US dollar versus the euro. Gross margin increased by 6.4 points versus Q2 '16, and by 6.5 points in the first half-year comparison, principally due to increased material and labor efficiencies as well as Forex benefits from the increase in the value of the US dollar versus the euro. Q2 '17 operating expenses increased by EUR 3.6 million or almost 12% versus Q1 '17, and were within prior guidance.
The sequential increase was due principally to higher warranty, service, and other variable expenses associated with substantially higher sales levels. Fixed overhead expenses increased very little quarter to quarter. Similarly, OPEX grew by EUR 5 million or 17.2% versus Q2 '16 due to the same factors along with some higher service and R&D personnel expenses. At quarter end, Besi's headcount increased by 6.5% sequentially and by 20% versus year-end 2016, principally as a result of higher Asian temporary production personnel in support of the large H1 '17 order ramp and expanded Asian operations. As you know, we scale our production headcount upwards and downwards on a regular basis depending on anticipated order levels. The profitability and increased efficiency of Besi's business model in an industry upturn was evident this quarter.
Net income of EUR 52.4 million in Q2 2017 and EUR 76.7 million in the first half-year, each substantially exceeded prior-period comparisons. Profit growth was principally due to substantially higher revenue levels, continued gross margin improvement, and ongoing cost control efforts. Similarly, net margins grew to 30.8% in Q2 2017 and 27.4% for the first half-year, well exceeding the upper end of internal expectations set at the beginning of the year. The effective tax rate of 13.7% for the quarter and 14.4% for the first half-year was within our prior guidance of 10%-15%. Besi continued to generate strong levels of operating cash flow this quarter, even despite internally financing the 49% first-half revenue ramp versus last year. Excluding the EUR 65.3 million Q2 2017 dividend payment, net cash increased by EUR 21.1 million sequentially.
As compared to Q2 2016, Besi's net cash increased by EUR 20.8 million or 18.8%, even accounting for increased dividend payouts year-over-year. You will also notice that our capital intensity is very low with EUR 2 million of total CapEx for the first half-year of 2017. Our major investments are in our technology and people, while our capital investment in bricks and mortar is mostly for the account of our suppliers. During the quarter, share repurchase activity continued on a regular basis. In Q2 2017, we repurchased a total of 120,000 shares at an average price of EUR 45.56 per share. Cumulatively, as of June 30, 2017, we have purchased 430,000 shares under the current 1 million share authorization at an average price of EUR 36.96 Per share for a total of EUR 15.3 million. With that, I'll turn the presentation back over to Richard.
Thanks. I'd like to update you on our strategy, the market, and the guidance for the third quarter of this year. One of Besi's strategic objectives is to achieve a more scalable, flexible, and lower-cost manufacturing model. We thought it helpful to highlight our progress in this area today in light of our first-half results and revenue achievements. To put our strategic progress in perspective, we examined in this next chart two large revenue ramps over the past three years, one in the first half of 2014 and the current ramp in the first half of this year. As you can see, due to Besi's efforts in recent years to shorten cycle times, qualify additional Asian vendors, and increase the production capabilities of both our Malaysian and Chinese operations, we increased unit production by 40% on a comparable basis.
We successfully completed this ramp at a gross margin improvement of approximately 13-14 points, further highlighting the transformation of our production model. We achieved an annualized production run rate of EUR 680 million this quarter with minimal CapEx investment, indicating that we have the production capability to grow our business in excess of current revenue estimates by analysts. We will continue our efforts to enhance the production model in the years ahead via our common platforms initiatives and increased local Chinese production, amongst other initiatives. A couple of words about the market and our third quarter 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 Research recently upgraded its 2017 assembly equipment market growth rate to 16%, up from 13% in May, and 9% at the start of this year. It currently forecasts growth to continue in 2018 with a growth rate of 4%, down slightly from 5% estimated in May. As most of you know, our business has become more seasonal due to the increasing importance of more retail electronics applications as a driver for semiconductor unit growth. Besi's orders ramp in the first half of a year and then decline in the second half as capacity is digested and products are introduced. This year is no different. The midpoint of our revenue guidance for the third quarter indicates quarterly, sequentially, revenue decline of about 10%, which is below the five years' historical average decline of 15%, albeit from more elevated Q2 revenue levels versus prior years.
To summarize, our third quarter guidance calls for revenue to decrease between 5% and 15% versus second quarter, with gross margins anticipated to be in the range between 55% and 57%, assuming current Forex rates. In addition, OPEX should decline by 5%-10% versus the second quarter levels. Assuming the midpoint of Q3 2017 guidance, Besi forecast that revenue and operating income will substantially exceed the third quarter of last year. That ends my prepared remarks. I would like to open the call for some questions. Operator.
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. Star one for all your questions or remarks. Go ahead, please. The first question is coming up from Mr. Nigel van Putten, ING. Go ahead, please, sir.
Hi, good afternoon, and congrats on another strong quarter. To that point, my first question is, I think we're starting to see some more meaningful divergence between Besi's performance this year and some of your peers. Not that they're doing a bad job, but you seem to be taking a lot of share in the first half, and also your outlook for the second half seems to be a lot stronger. Just, can you give some context on what is sort of driving your outperformance this year versus others?
It is all about choices and focus. If you look at Besi's focus over the past many years, we are focused on the most advanced applications, sometimes also referred to as high-end, very selectively, and by that focus, our market position has strengthened gradually. Some of our peers have either an even more focused strategy into the higher end with different product platform choices. One could say that our strategic development choices in the advanced packaging arena have been evidently today the right ones and less successful with others. There is also a broader market, out of the 100%, we have a market share of around 30%, maybe somewhat more now. Sometimes it is the lower end of the market, the middle end of the market.
Summarizing, one could say we have currently the right horses in the race, the right focus, as opposed to others, which may have at this moment, a somewhat less successful focus. That does not guarantee any future direction because this market, as we all know, is very technology-driven, and it is all about choices, and that is key to understand for the future.
That is clear. As a follow-up on that last point, choices. Could you give us some rough idea on your exposure to dual-camera and 3D sensing chips? Is that a very meaningful part of revenue in first half, and how should we expect that to develop going forward?
That certainly is, and strong part of our involvement in the smartphone world. Also there are many different solutions. Many smartphone manufacturers have different camera concepts. We have focused on certain areas, and that has been very successful right now. My message is, this market does not have only one solution, there are many different solutions. Over time, Besi has shown that we are able to make the right choices in the areas which grow the most, and that is key, of course, to maintain.
Yeah, that's clear. That one of your peers has sort of hinted as a meaningful slowdown as we, I guess, look into the next period, next half year, next 12 months. Do you see any similar risks to your outlook into H2 or 2018? I know you don't want to quantify, just in general.
Well, we always say there are three pillars to a successful strategy so far. One of that is the mobile internet devices, which is about 30%-35% of our revenue. We have the whole computer world, the cloud server world in particular. That's about 25% of our revenue, somewhat smaller, also very strong. Automotive has climbed to 20% of our revenue. The focus in the first half of every calendar year so far has been very much on the new models of the internet devices. Second half is clearly very strong in automotive. That has already developed since the end of last year as well. The whole cloud server world is a very positive investment round. Yeah, the percentages may shift, overall, the bottom line for the sector is a positive one.
That's clear. Thanks. I'll jump back in the queue.
The next question is coming from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead, please, sir.
Good afternoon, gentlemen. Three questions from my side. First on the demand from IDMs. In the press release, you talk about capacity expansion, driving demand for die bonding equipment in the mobile space. Typically, these flagship smartphones are launched in Q3. What does that mean for the die bonding capacity expansion? Has that been mostly done for this year? Will that continue in Q3, maybe even in Q4? Maybe a bit more color there. A question on fan-out wafer level packaging. The investments took off last year. This year, your customers seem to be digesting some of this capacity. Based on your discussion with clients, do you see the investments potentially picking up next year? Finally, a financial question related to taxes.
For Cor, I guess if I look at the cash flow statement, the tax charge has been lower than what we have seen in the P&L in recent quarters. Are we likely to see something similar in coming quarters, and if so, why is that?
Okay. Let's start with your first question. It ties also to the other question earlier. Die bonding equipment is needed for every semiconductor, whether that is in mobile internet devices or in the logic microprocessor arena, or whether it's in memory or every chip has to be bonded. There is always a shift between the first half of the year, as you said, where it's more focused on the flagship. There are also Chinese smartphone manufacturers in the meantime, very much advanced, which have somewhat different cycles. As I mentioned, automotive is strongly expanding, also in the other space, in the cloud server arena. Please understand that die bonding is not only related to smartphones.
That's clear.
Depending upon how the market will further develop, whether the underlying strength currently leads into 2018, that's of course a question on everybody's table. So far, all of our customers, peers, are expressing a very positive underlying sentiment. On the wafer-level arena, yes, last year was an investment. It's clear that there's some digestion, and it's also very well possible that that will further expand in the course of the next year. Still, there's a major cost difference between wafer-level and using substrates, and that battle is ongoing. Since cost is the most important factor in this market, the end of substrate assembly is certainly not around the corner. That will continue for years to come. On certain high ends, there are many advantages in wafer-level application, especially in the processor arena. Still, memory is highly viable in the term.
There's a major field in between, which is flip chip interconnect technology with reflow. That landscape will change slowly as it has always done, similarly to flip chip in the past 15 years. Next question about taxes, Cor. You can certainly
Yes. There's a significant delta between the taxes we report in our P&L and the taxes that we actually pay, as you can see in our cash flow statement, and that has to do with the fact that we still have tax loss carry-forward available. Specifically, if you look in our annual report, you see a specification of tax loss carry-forwards available in the Netherlands, in the U.S., and in Switzerland. As long as we have tax loss carry-forward available under IFRS, you typically report the statutory tax rate for each country. As long as you can offset that tax-wise against the tax loss carry-forward, the cash-out charge will be very limited. Your question, how will that proceed for this year? We will see a gradual increase of the cash-out in the cash flow, but not significant.
You can see that in the annual report that in the meantime, in Switzerland, all of it is consumed. In the years going forward, there will be an increase, but still at the level of the statutory rate in Switzerland, which is 10%. For the rest, only when all tax loss carry-forward is consumed, you will see that the tax-out will be higher. Currently, that is still limited. It's a delta between tax loss carry-forward still available and actual payments in countries where we don't have tax losses.
Okay. That's helpful. Thank you.
The next question is from Mr. Nigel van Putten, ING. Go ahead, please, sir.
Hi. That's quick. Let's see. If we talk about automotive and the server space, and both look very strong at the moment. If I then zoom in on the server ramp, it seems that the space might continue to be very exciting next year with strong demand for logic and 3D NAND, I guess that's known, but also now what I'm reading, at least High Bandwidth Memory coming on steam. First question, is this technology move potentially positive into sort of the coming years? On the automotive space, I guess that market is moving towards you as a lot more sophisticated technology is now in those cars. Just to make sure that I'm making the right assumptions, how does your market share compare in this space compared to your overall level of, like you said, around 30%?
Let's start with automotive. Historically, our market position in automotive has been higher than that in other markets in general. The reason for that is that automotive requirements are substantially more stringent than that for consumer end products. Qualifications in the automotive space are lengthy, and all of our products have been involved in that space for many, many years with the leaders in the European market, Infineon, STMicroelectronics, NXP, Bosch, and Continental in particular, and then in the U.S., many customers in the automotive space, but even in Japan. With increasing growth in that space, our position and our strength will only help us to benefit even more from that growth. In the other questions, yes, both on the next generation memory and also the logic ramp for server devices. We are definitely benefiting from that, and we will benefit in the years to come.
Still, the very high-end is not the largest market in terms of volume. Automotive is a much higher volume market. We've seen that earlier with TCB, the first rounds, and I also answered that to an earlier question. These ramps are steps, but not covering the entire industry. Because the technologies have different assumptions and variations, but costs predominantly because of yields, is still holding these new technologies somewhat back. Does that answer your question?
Yeah, that's clear. Thanks very much.
Ladies and gentlemen, for any additional questions, you can press star one. For any additional questions, star one. Go ahead, please. Mr. Blickman, no further questions at this moment. Please proceed.
I thank everyone for attending this call. In case you have any further questions, please do not hesitate to contact us. Thank you. Bye-bye.
Bye.
This concludes BE Semiconductor's event call. Thank you for attending, and you may disconnect your line now.