The conference is now being recorded.
Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's quarterly conference call and audio webcast to discuss the company's 2017 first quarter results. The audio webcast is available on www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer, and Mr. Cor ten Hengel, 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 written permission from the company. I would now like to hand the call over to Mr. Richard Blickman. Go ahead, please, sir.
Thank you. Thank you all for joining us today. I 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 of our first quarter ended March 31st, 2017, and also spend time updating you on the market, our strategy, and the outlook. First, some overall thoughts on the past quarter.
In Q1 this year, we realized strong revenue growth in line with guidance, operating profits that exceeded expectations, and a 162.4% order increase versus the fourth quarter last year, reaching EUR 239.8 million. Also, our first quarter results position Besi for a strong first half 2017 financials performance. The substantial order growth in the first quarter was due to a variety of factors, the most prominent of which was a significant expansion by IDMs and their respective supply chains of die bonding capacity for next-generation mobile devices. Our leading-edge portfolio of multi-module epoxy and flip chip die bonding systems are uniquely positioned to capitalize on this capacity build by first movers in the industry who require the most demanding specifications in terms of form factor, pitch, complexity, and production output. In addition, Besi also realized broad-based order growth for its advanced packaging systems, addressing automotive and high-end cloud server applications.
We also experienced increased demand by Chinese subcontractors for smartphone and mainstream electronics applications. Order growth in these areas reflects a continuation of trends from 2016. In the first quarter, revenue increased by 18.4% versus Q4 last year and 39.5% versus the first quarter last year due to the benefits of a more favorable industry environment that started at the end of the fourth quarter, as well as increased demand for smartphone applications. Revenue growth, combined with continued improvement in gross margins to 55.7% and tight control of baseline operating expenses, enabled Besi to generate net income of EUR 24.3 million in the first quarter and a net margin of 22%. Net income levels more than tripled versus the first quarter last year, while net margins more than doubled versus the year-ago period, reflecting the enhanced profit potential of our business model.
With that, I'll turn the presentation over to Cor ten Hengel.
Okay. Thank you, Richard. Our strong Q1 2017 revenue growth was within Besi's prior guidance of up 15%-20% as compared to the previous quarter. Perhaps the biggest story, as Richard mentioned, was the substantial growth in our order book, both sequentially and year-over-year. Q1 2017 order growth came mostly from IDMs, with sequential growth of EUR 145 million or 284%, while subcontractor orders increased by EUR 3 million or 7.5%. As you know, our mix between IDMs and subcons is typically 50/50 or 60/40, so we consider this as more a one-off event than a structural shift in our order mix. Besi's gross margin rose up to 55.7% in Q1 2017, an increase of 2.5 points versus Q4 2016 and 6.5 points versus Q1 2016. This quarter's gross margin exceeded prior guidance of 52%-54%.
We continue to operate at the high end of our target gross margin range of 50%-55%, given our leading market position in advanced packaging applications, the current upturn, incremental efficiencies from our Asian operations, and favorable foreign currency trends. In Q1 2017, improved gross margins were principally due to increased material cost efficiencies, particularly in the year-over-year comparison, and forex benefits related primarily to a decrease in the value of the Malaysian ringgit versus the euro. In addition, Besi benefited in the year-over-year comparison from an increase in the value of the US dollar versus the euro. Besi's Q1 2017 operating expenses increased by EUR 0.7 million or 2.3% versus Q4 2016. This was less than prior guidance of an increase of 5%-10%.
The increase was due primarily to higher bonus and benefit compensation associated with our 2016 financial performance, partially offset by lower advisory costs. As per the chart presented, you can see that baseline OpEx is growing very slowly versus our top-line development, given ongoing cost control efforts as well as the benefits of continued functional SG&A transfers to Asia from Europe. Of note, the headcount at March 31st this year increased by 12.8% versus end of last year, principally as a result of higher Asian temporary production personnel in support of the large Q1 2017 order increase and expanded Asian operations. The full impact of this headcount increase will be seen in our Q2 2017 OpEx guidance, along with increased revenue-based variable expenses. Besi's net income reached EUR 24.3 million in Q1 2017, an increase of EUR 7.6 million or 45.5% versus Q4 2016, and EUR 16.3 million or 204% versus Q1 2016.
Similarly, net margins increased to 22% in Q1 2017 versus 18% in previous quarter and 10.1% in Q1 2016, in what traditionally is a weak quarter. Net income growth was principally due to our strong revenue development, continued gross margin improvement, and operating leverage in our business model from ongoing cost control efforts. The effective tax rate varied only slightly in each of the comparable periods. Our liquidity position continued to improve, with net cash rising to EUR 175.7 million at the end of Q1 2017, an increase of EUR 7.6 million or 4.5% versus Q4 2016, and EUR 27.3 million or 18.4% versus Q1 2016. Growth occurred despite EUR 18 million invested in working capital to finance the large order ramp during the quarter and EUR 7.5 million of cash used for share repurchases.
Remember that we intend to pay out approximately EUR 65 million for dividends in Q2 2017, which will reduce net cash balances at quarter end from current levels. Regular share repurchase activity continued in Q1 2017, with approximately 167 ordinary shares bought at an average price of EUR 35.03 per share. Cumulatively, as of March 31st, 2017, a total of approximately 293,000 shares have been purchased at an average price of EUR 33.42 per share for a total of EUR 9.8 million. With that, I'll turn the presentation back over to Richard.
Thanks, Cor. I'd like to update you on our strategy, the market, and guidance for the second quarter. Looking forward, there still remains much unrealized potential to increase Besi's market position and profitability in the years ahead. Last quarter, we laid out our updated strategic agenda, which we're pursuing actively. Currently, our principal focus is further scaling our Asian operations and supply chain to support the current order upturn and ensure on-time customer deliveries this year. We have sufficient capacity to handle this ramp, partly due to the efforts of the past two years to qualify additional Asian vendors and increase the production capabilities of our Malaysian and, in particular, Chinese operations. A couple of words about the market and our second quarter guidance.
We witnessed the favorable upturn of the assembly equipment market in late Q4 last year, which has continued into the first quarter of this year and to date in the second quarter. The underlying baseline for semiconductors remains positive, with Gartner recently upping its semiconductor growth forecast from 7.5% to 12.5% this year. VLSI has not revised its 2017 and 2018 forecast for the assembly equipment market yet from the start of the year. They initially forecast growth of 9% in 2017, which could be at the low end of estimates given the first half of 2017 industry activity. There are many drivers for our market at present. Such drivers include anticipated new smartphone and electronic device introductions, the continued shift to smaller geometries and new applications for semiconductors in cars, and also the digital society in general.
In addition, we will also benefit from the ongoing move to the cloud and the rapid emergence of a Chinese semiconductor industry. Such trends provide strong underpinnings for growth in the new advanced packaging solutions and plays to Besi's technology strength and market-leading position. Besi's second quarter this year guidance calls for revenue growth between 40% and 50% versus the first quarter. Gross margins is expected to be in the range of 54% to 56%, and OpEx should grow by about 10% to 15%, consistent with recent headcount growth and higher anticipated sales levels. Given our improved 2017 business outlook and the midpoint of the second quarter 2017 guidance, we forecast that operating income for the first six months will exceed the full year of 2016 levels. This ends my prepared remarks. I would now like to open the call for some questions. Operator?
Thank you, sir. Ladies and gentlemen, we're starting the question and answer session now. If you have a question or remark, please press star one now on your telephone. Star one for questions or remarks. Go ahead, please. Our first question is from Mr. Peter Olsson of Kepler Cheuvreux. Go ahead please, sir. Your line is open.
Good afternoon, gentlemen. Clearly very strong numbers, looking at the order intake on the IDM side. Just trying to understand what's driving this demand. You're referring to next-generation mobile devices. Are there specific applications or features in these devices that are driving the demand, like sensors? Or is it pretty broad-based for different type of chips going into these devices?
Well, it's not only about smartphones. It is, as we indicated, on all three major markets. The high-end server market, automotive, also very strong. Also the smartphone arena. There are certainly new applications included with tighter specs and more challenges, which have been developed by many customers over the past several years and should be implemented in next-generation product. Whether that is sensors or whether that has to do with other features, it's a very broad-based increase, and clearly, IDMs are always leading the way, and subcontractors tend to follow. Also with the consolidation in the industry, more and more transparency is available through direct ordering of IDMs through the subcons and installing the capacity either at the IDMs, but mostly at subcontractors. That is the current picture.
Okay. When you say it's broad based, you also mean, within the mobile device market, meaning you see it in various supply chains?
Yes. As we mentioned in the call, in February, Besi is more and more strongly represented in the Chinese smartphone world, on top of our many years' strength in the leading-end devices for many years. A very broad-based smartphone world.
Okay. I heard you talk about advanced packaging for high-end cloud server. Is that particularly TCB related, or what kind of product should I think of?
It's a combination. Still, TCB is very low in volume, for the very high end. The mainstream you can characterize still using current but also very advanced technologies in flip chip, but also in wire bonding for that matter. It's pushing the envelope of existing technologies and slowly using new technologies there where the existing are not able to fulfill the technology criteria.
Okay. Maybe final question on my side. To what extent do you think the very strong order intake from the IDMs is sustainable?
Well, as we know very well, the world is cyclical. Clearly, we are in a positive setting, as mentioned in overall, and you can read that with many of the articles on this industry and on the equipment in particular. At the same time, there's clearly a next-generation technology on the way. If we take Theosys, which we also mentioned, expecting 2017 and 2018 to be positive growth years. Whether it will continue at the pace we've seen in the first quarter is of course to be seen. As we mentioned, Q2 started off similarly well as Q1, we do have already some significant visibility into Q3. So far so good.
Maybe just to clarify on the visibility that you have for Q3 already. If I look at the backlog that you have going into Q2, that's higher than what you're guiding for in terms of Q2 sales. Apparently, some of that is.
Exactly
for the second half. Is that because the client wants the machine in Q3? Is that the key reason, or is there any indication that your lead times are lengthening?
No. The customers typically have a program installing a certain capacity. When it's one machine, it's easy. When it's multiple machines, the installation is typically organized over a period of time. There are certain orders which are partly shipped in Q2 and partly shipped in Q3.
Okay.
That's always the case, you've seen very well that the backlog going into Q2 and the revenue guidance for Q2 already gives us a very good visibility into Q3.
Okay. Yeah, that's clear. Thank you.
Our next question is from Mr. Nigel van Putten of ING. Go ahead, sir, your line is open.
Afternoon, gentlemen. Congratulations on the strong executions and the order intake. Some of the questions have already been answered. First one is on the market forecast by VLSI. You said it's a bit conservative, but if you look around, do you think your growth in 2017 is primarily driven by the market upturn, or is it mostly due to market share gains?
Well, I think it's a very interesting question. We have seen nowhere the growth in orders forecasted by the independent market organizations, like our increase. If you analyze that, it could very well be that we are gaining market share, and that will then be very significant. How conservative VLSI is, one never knows. Take last year, for instance. In 2016, VLSI guided into a negative year, and in the end it ended with a growth of double digits. This industry is hard to predict, but the conclusion for us is we started off very well and on a very broad base.
Yep. Understood. Then one follow-up. Peter just asked about the IDMs being a larger percentage of the order book. I think the U.S.-based IDM at the manufacturing day was quite open about its intention to focus more on packaging, and I think the major Taiwanese foundry also said it's going to spend up to EUR 1 billion on its back-end processes. Besides the cyclicality, do you see sort of a longer-term trend where the historically called back-end processes or equipment is becoming more important for these leading-edge players?
Yeah. First of all, more and more advanced packaging is becoming the bottleneck for new product introduction for IDMs. Their focus on developing at the right point in time, the advanced packaging solutions, has increased in comparison to the trend over the past years. Still, the volume production will be installed at many subcontractors. The position of the IDMs in that process is more predominant than that used to be in the past, simply because it's more critical.
Yep.
It will be even more critical going forward.
Right. Maybe as a quick follow-up on that is that do you think that you are particularly well-positioned because of the higher accuracy your equipment typically has to cater to this demand?
Well, currently you could draw that conclusion. We are very well-positioned, very close to the winners in this industry at this moment. That is a very tight rope to walk on.
Every day you have to prove your solutions being superior to that of your competitors. It's fair to say that currently we have a very strong position.
Understood. Thanks, congratulations again.
Thank you.
Thanks.
The following question is from Mr. Robert Sanders of Deutsche Bank. Go ahead, sir. Your line is open.
good afternoon, and thanks for taking my question. My first question was just a clarification, which was just regarding the big Taiwan foundry. You think that's classified under IDM, under your nomenclature, I assume. I just wanted to double-check. That was my first question.
That's under IDM.
Got it. Okay. When you think about the order pattern relative to history, what do you think explains this dramatic change in order pattern relative to history? It's very rare that you get this kind of lumpiness. Is it more driven by a technology shift, or is it just that the stars have aligned, everyone is fully utilized, and everyone needs new capacity ASAP?
No, it is more the first time. Clearly, our current set of products is uniquely positioned in every qualification, and that's why we have received such a strong amount of orders on a very broad base. This is not a one or two-customer phenomenon. Realizing that should put us also in a much stronger position going forward.
Got it. We shouldn't read into this that.
Competitors are cool.
Got it. We shouldn't read into this that somehow wafer-level packaging fan-out has suddenly reached an amazing cost performance threshold and is suddenly going to go gangbusters, because that wasn't the perspective I got last time we chatted.
No, it's more the contrary. It's a very important question you are posing. Yet again, this cycle is predominantly using the existing technologies, and the new technologies, fan-out, TCB, are still pushed out into the next generation in volume. It's very interesting to see that this industry has the possibility to push those envelopes.
Got it. Okay. Thanks a lot.
Our next question is from Mr. Edwin de Jong of NIBC. Go ahead, sir. Your line is open.
Good afternoon, gentlemen. A couple of questions left. Could you tell maybe a little bit about pricing developments and volume developments going into Q1, Q2? A little bit about the mix, maybe. On the backlog, could you give an idea of how it is split by geography? As a last question, how much way do you have to go before you really are at full capacity?
Excellent. Well, the first question, pricing and volume. You can see also in the guidance for the second quarter that pricing is still very strong of our products. It depends on several factors, of course, the competitive position. It depends on the Dollar-Euro exchange rate. So far, there are no changes in these trends.
It's mostly a volume development.
Yeah, under the current competitive pricing position. Maybe some improvements even, because in the current situation in the industry, there's a very strong demand, that always supports pricing of equipment. Your second question, backlog geographies. That is very much as it usually develops, with Asia being a larger part than the rest of the world, U.S. and Europe.
Within Asia, is it getting more China?
It's more now China. If the percentage in China has again gone up in the first quarter compared to the fourth quarter, one can expect that going forward, the percentage in China will increase further, we are well-prepared for that with more and more systems we built in China in our own facility. Are we at full capacity? No, not yet. We are able to expand our capacity further. We have shared some models in the past, our current infrastructure is certainly able to cope with the current demand, also further increases are possible. Key is to understand China coming on stream. We have shared last year, we did close to 140 systems in our China facility. This year, that will be certainly close to 300. We also expanded Malaysia. That's not a concern at this moment.
Okay, great. Q2 is great. The outlook for Q3, it's also still good. Q4, do you already have any indication or idea where that could be going?
No, that's too early to tell. You can only use some statistics, but that can also surprise in different ways. We look ahead usually one quarter. This time, we are able to look a bit further than one quarter, but that's it.
Okay, fair play. Thanks.
We have a further question from Mr. Peter Olsson of Kepler Cheuvreux. Go ahead, your line is open. Mr. Olsson, your line is open.
Yes, I had two follow-ups. First, on the gross margin. In the second half, in terms of sales, the IDM share will be pretty high. Does the share between IDMs and subcontractors affect your gross margin? Is there a margin differential between the two?
The answer is no.
Okay. That's very clear. Just to clarify that TSMC is classified as an IDM. Is that correct? Is that what you said?
Yes.
Okay, because in some of your presentations, you have shown their logo as among the subcontractors. Okay, it's good to know that's then in IDMs. Okay, thank you.
Yeah.
We have another question from Mr. Robert Sanders of Deutsche Bank. Go ahead, your line is open.
Yeah, just a follow-up question would be on Intel. I think it was mentioned earlier in a previous question. They're one of the few companies that develops its own packaging tech. I was just wondering if there's anything in the server or graphics or whatever area, there's been a lot of talk about, for example, HBM, that could lead to a significant change in the amount that they spend, and whether that could affect you in this way, because it does seem quite unusual for them to spend so much more. I'm just wondering if there's any technology disruption that could be there that could benefit you guys. Thanks.
Well, first of all, to clarify, the company you mentioned is not the only one developing packaging solutions. The whole world is developing packaging solutions, all the IDMs and also the fabless companies. As I responded to an earlier question, more and more, the development of assembly solutions is key to the performance of the end product, as opposed to in the years back, assembly was a capacity part of the industry and simply electronic building blocks. There's more to this world than only that company developing on an ongoing basis, new package designs and more complex 3D solutions using different technologies. The key is to be engaged with the broad base of the assembly packaging development companies in all the areas, whether that is the server world or the telecommunications smartphone world, or the automotive world for that matter.
There are no, let's say, at this moment, significant changes. There's no significant changes. It's even more a bit the opposite, as I answered to an earlier question. It's, again, a generation which uses existing technology, where our systems time again prove to be able to fulfill the accuracy requirements, but also with further increased speed, reduce the cost of ownership. On top of that, the stability is superior to many of our competitors. It's not because of the world's change, shift, or however you want to call that.
Got it. The reason I mention is because, ASM Pacific, which is probably your closest peer, I don't think they are seeing this level of strength. If anything, I think they're going to see an order decline in the second half. It seems to me that they're saying that the market has peaked on orders, and you guys are even more bullish than them, which is unusual. I was just trying to get to that, but I guess there's not much you can say on that. Thanks.
Okay. Thank you.
We have a further question from Mr. Nigel van Putten of ING. Go ahead, your line is open.
Hi. Thanks. I've a couple of housekeeping questions. I was dropped from the line for a bit, so apologies if I make you repeat. Cor, on the OpEx level for the second half, can you give a bit of guidance? Second question is on the interest for the quarter was a bit higher. Part of that is FX. What should we assume for the quarters ahead? On the tax rate for the full year, could you provide a bit of guidance there as well?
Okay. Well, cost level, as you can see in the guidance, we expect an increase of 10% to 15%. That goes along with the increase of revenue. As you know that a number of components of our costs are related to the volume in revenues like warranty, like some sales commissions, and like some, let's say, outgoing freight cost to customers. They will be typically the main driver behind this increase as we guided in Q2.
Okay.
Financial income. Basically, there is the cost for the convertible. There's also what we call IFRS component in the interest. It's not only the 2.5%
Cash out is also partly an IFRS component, which has to do with the valuation of the possibility to exchange against shares, against equity. Part of it is Forex that is mainly related to a difference in timing. We hedge immediately, but sometimes the rates we have to use are a bit different from the banks, then it's not really a loss or gain, but it could show up in another line in the P&L. That's a technicality. Going forward, the financial costs will be more or less in line with Q1. Could be somewhat lower because we had somewhat more Forex, but more or less in line to slightly lower. The overall income tax, effective tax rate, as last year, Q1 is slightly higher than the other quarters as we have some more LTI costs in our Q1 traditionally.
Over the year, we guided between 12% and 15%, and for now, there's no reason for a change.
Clear. Thanks.
Ladies and gentlemen, if there are any further questions or remarks, please press star one now on your telephone. Star one for further questions or remarks. Go ahead. Chairman, we have no further questions at this time. Please continue.
Well, thank you all for joining this call, and if you have any further questions, you know where to reach us. Thank you. Bye bye.
Bye.
This concludes this conference. On behalf of Besi, thank you for attending. You can disconnect your line now.