Good morning. Good afternoon, ladies and gentlemen, and welcome to the BE Semiconductors quarterly conference call and audio webcast to discuss the company's 2016 Q3 results. The audio webcast is available on Besi's website, www.besi dot com. Joining us today are Mr. Richard Blickman, Chief Executive Officer and Mr.
Korfte Hennepe, Senior Vice President, 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 turn the call over to Mr.
Richard Brickmann. Go ahead, please.
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 we will take your 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 13 this year and also spend some time updating you on the market, strategic initiatives and the outlook. First, some overall thoughts on the past quarter and year to date results. Baby reported another solid quarter with Q3 'sixteen revenue and profit exceeding expectations and strong cash flow generation. Revenue increased by 30.7% versus the Q3 last year, primarily due to increased investments by customers in mobile and automotive advanced packaging capacity in a market more favorable than a year ago. Similarly Besi's seasonal 13.5 percent quarterly revenue decrease versus Q2 twenty sixteen improved significantly from last year's 30.9 percent sequential quarterly revenue decrease.
Net income of €16,600,000 increased by 163.5% versus the same quarter last year as revenue expanded and we realized increased efficiencies from our business model due to Besi's strong market position and ongoing strategic initiatives. In addition, net margins more than doubled to reach 17.6% versus the Q3 last year. Further net cash grew to €131,900,000 in the 3rd quarter due to strong profit generation and enhanced working capital management. Besi's solid financial Besi's solid profit and cash flow generation have enabled us to significantly enhance shareholder value in recent years. In October 2016, we completed a 1,000,000 share buyback aggregating €22,500,000 Since 2012, Besi has spent €157,000,000 on dividends and share repurchases using excess cash resources.
Given our outlook and prospects, we have initiated a new share buyback program up to a maximum of 1,000,000 shares through October 2017. Besi's 9 month results also demonstrate solid financial and strategic progress and the operating leverage in our business model. While revenue grew by 4%, net income of 48,600,000 grew by 23.7% and was roughly equal to our net income for the whole year 2015. Revenue growth has benefited from increased investments by Chinese and Taiwanese subcontractors to expand advanced packaging capacity. The favorable influence of a new technology cycle to further shrink device geometries and the expansion of Besi's market position in the major supply chains.
Net income development has benefited from top line growth, higher gross margins from increased labor and material cost efficiencies and the execution of strategic initiatives to control operating expenses. With that, I'll turn the presentation over to Corre de Hennepe, our SVP of Finance. Thank you, Richard.
Besi had a good quarter on both a top and bottom line basis. The Q3 'sixteen sequential revenue decrease was primarily due to lower die attach demand by Asian subcontractors for mobile applications after a large first half capacity build and typical seasonal factors. The partial offset was ongoing strength in the automotive applications. However, Q3 'sixteen revenue was better than guidance and increased significantly versus the Q3 of last year. Growth was primarily due to significantly higher demand for die test systems by Taiwanese and Chinese subcontractors for mobile applications.
We also saw strength in sales of epoxy die bonding systems for fingerprint sensor applications. Orders decreased by 20 2.3% versus Q2 'sixteen, primarily as a result of lower customer demand for mobile automotive and high end server applications by both subcontractors and IEMs and typical seasonal influences. However, orders increased by 4.2% versus Q3 'fifteen, reflecting general strength in both dietetics and packaging systems, although order growth varied per individual product. Year to date, Besi's revenue and orders increased by 4% and 4.2% respectively versus year to date 2015, primarily due to increased demand by Asian customers for Besi's range of high end and mainstream assembly solutions and more favorable industry conditions. In particular, we saw strength in our epoxy, wafer level and multi module bonders and ultrathin molding systems.
We continue to operate at the high end of our target gross margin range this year. In Q3 '16 basis gross margin decreased sequentially by 0.4%, primarily as a result of higher labor and freight costs, but partially offset by increased material cost efficiencies. As compared to Q3 2015, 1.8% point gross margin increase was primarily due to labor and material cost efficiencies, as well as foreign exchange benefits from decrease of the Malaysian ringgit versus the euro. The benefit of Besi's cost control and personnel initiatives were evident in our Q3 9 month financial results. Our revenue expanded versus both Q3 2015 and the 9 month period.
Expense growth was contained thus aiding the growth of our bottom line. In addition, baseline OpEx continues to remain roughly within the range of €22,000,000 to €25,000,000 per quarter. Headcount trends continue favorably as we increase lower cost fixed personnel in Asia, while reducing higher cost European employees and vary our temporary personnel per quarter depending on shipment forecasts. Basically favorable net income development this year reflects both the progress of our product portfolio as well as increased efficiency of our business model. With 30.7 percent revenue growth, higher gross margins and cost controls, net margins approximately doubled to reach 17.6% in Q3 2016 versus the Q3 of last year.
Similarly, net margins grew to 17.2% year to date versus adjusted net margins of 13.3% in the prior period of 2015, which excludes restructuring benefits of €3,300,000 Besi's effective tax rate of 11.1 percent for Q3 2016 and 9.8% year to date are at the low end of our target range 10% to 15%. Quarterly tax rates can vary based on the relative profit mix of our subsidiaries and periodic changes in valuation of deferred tax assets in recent years. Besi continues to generate strong cash flow from operations a result of higher levels of profitability and improved working capital management, particularly in the area of supply chain management and inventory control. At the end of Q3 'sixteen, Besi's cash and cash equivalents increased by €21,200,000 versus the Q2 of this year to reach €153,300,000 and the net cash increased by a like amount. Year to date Besi generated cash flow from operations of over €65,000,000 of which 45,400,000 euros was utilized to pay cash dividends and €17,500,000 was utilized for share repurchases.
During the quarter, Besi repurchased 231,000 of its ordinary shares for €6,300,000 and completed the 2015 repurchase program post quarter end. And with that, I'll turn the presentation back over to Richard.
Thanks, Cor. Now I'd like to update you on the market and our guidance for Q4 'sixteen. Besi's strategy focuses on technological leadership in those markets with the greatest long term potential. Of equal importance, we seek to reduce costs to enhance our competitive position and increase profitability. On the product side, we refresh systems every 1 to 2 years to meet ever demanding industry specs for speed, accuracy and miniaturization.
In addition, we are at the forefront of technological processes such as TCB and wafer level processing, which have favorably influenced revenue development in recent years. In 2016, customers added to their advanced packaging capacity particularly Chinese and Taiwanese subcontractors in response to customer roadmaps for under 16 nanometer applications. As such, we've seen a significant order increase for Besi's EWLB systems, a market in which we have the leading market share. The TCB market has been relatively quiet in 2016 versus strong growth in 2015, as memory manufacturers digest capacity purchases and determine future demand. We have not seen meaningful application expansion beyond the memory market to date.
Besi is also seeking additional opportunities in the solar and battery plating markets after last year's success and to incorporate ever greater commonality in the parts and modules used in our platforms. From an operating perspective, Besi's major focus has been the successful expansion of our Singapore die bonding functional capabilities. In addition, we have greatly increased our Chinese die bonding production for the local market, which adds in the average 30% to Besi's total production capacity. Chinese production greatly expands Besi's revenue potential and adds another source of lower cost, flexible capacity with minimal capital investments. In addition, Besi completed the transfer of dry sorting production from Austria to Malaysia on time and as per plan in the Q3 of this year.
Now a couple of words about the market and our Q4 guidance. The industry outlook for the second half and full year twenty sixteen has improved significantly. VLSI has again upped its 2016 assembly equipment growth estimate, which now stands at 10%. This reflects both increased demand and a downward revision to 20 fifteen's market size. In addition, they now forecast continued growth of 9.6% in 2017 and 3.9% for 2018.
Since the increased utilization of semiconductors in retail applications such as smartphones and autos, our business has become more seasonal. Orders ramp in the first half of the year and then decline in the second half as capacity is digested and products are introduced. You can see in the chart that on average basis quarterly revenue declined sequentially by roughly 16% 12% in the 3rd and 4th quarter respectively. Thus, Q3's decline was slightly better than average and our 12.5 percent, Q4 16 degrees at the midpoint of guidance is right in line with historical averages. To complete Q4 guidance, we expect gross margins to remain in the range between 49% 51% based on Besi's current product mix and that OpEx will increase between 0 percent and 5% mostly due to one time higher advisory and consultancy cost.
Consequently, full year 2016 revenue and operating income are expected to increase by 4.5% and 6.9% over 2015 levels, assuming the midpoint of the 4th quarter guidance. We also expect to further expand our net cash position by year end from current levels. That ends my prepared remarks. I would like to open the call for some questions. Operator?
Thank you, sir. The first question is from Mr. Nigel van Putten, ING. Go ahead please, sir.
Thanks. Good afternoon, guys. So we ended your prepared remarks on the outlook according to VLSI. Can I just get your some more color on what you think will be driving 2017, your relative positioning? Do you think you can outgrow the market?
And also, if I remember correctly, previously, 2017 was meant to be a strong year because of the 10 nanometer ramp. Do you still have that view? And then for core, I was a little bit surprised by the uptick in operating costs. Can you provide a bit of guidance now you've completed most of your move of personnel towards Asia? What we should expect sort of as a run rate for next year in terms of operating expenses?
Thanks.
Okay. Let me answer your first question. 2017, yes, a further rollout of smaller design geometries, 10 nanometer to some extent, but most of course still in the 'fourteen, 'sixteen and 'eighteen. But in addition, there's a clear picture developing that we will have growth across the board after 2 years of very careful, you could say, recession, especially 2015, 2016 as mentioned has come out of that recession somewhat earlier than expected. Besi's products position in all of its areas has improved significantly year by year.
So that bodes well for a growth which may come our way if VLSI is right for 2017.
Yes. Thanks. And maybe if they're not right, would you still expect you to outperform the market? So I mean, not focusing on the VSI number, trying to see if you can outgrow the market, whatever that number may be?
Well, our focus, as you may know, is in the first place on sustained profitability. Market share as such is interesting from an end calculation, But our focus is day by day, quarter by quarter on finding the right spots in the mainstream of this market where we can generate above average margins and also net profits and cash. So if the growth does not happen and we have demonstrated that in the past years, I think we're now at quarter 24 profitable 7 years in a row. That's Besi's strategy. And then clearly in the higher segments of the market, both in or in the 3 pillars, the computing world, the high end processors for the server market, then we have the communication market, automotive.
And they're all impacted by general economic situations. And if the expectation for next year becomes more moderate, our product positions won't change. Does that answer your question?
Yes, definitely. Clear. Thanks. And then maybe the question OpEx still core?
Yes. Well, you asked for OpEx 2017. Of course, as you know, we don't guide for a year ahead. But in general, what we say is that we keep on working on our costs. The increase in Q4, because that's what you say, you see an uptick in Q4.
In the conference call, we just had some one time higher consultancy costs, But also plays a bit role is an IRS thing that's the provision for holidays. As you know, Q3, everybody goes on holiday, you have a reduction of the provision and then you start to build up again. That also added a bit to the uptick as we guided. For next year, we indicated clearly that we do everything to keep costs under control and to reduce our expenses. It's a bit difficult to give the guidance for next year.
But as we've demonstrated also this year, we don't let our cost go up dramatically. So you could expect cost at nickel or somewhat lower level, certainly no increase. This is certainly not the start of significantly increase of expenses.
One of the elements, Kare, you should add is building up Singapore. As you may know, we have expanded our process and service support, especially in the software arena and process of the various die bonding areas in Singapore. And we've added significant headcount. And by training the people at some point that will enable us to reduce the headcount in the respective European facilities. So you can expect that in the Q1, we will have some additional releases in Europe and that will bring down the average cost of the OpEx, again, closer to the lines as Cora just explained.
So on an ongoing basis, we have moves to Asia and always for some period there is sort of a double cost involved. And that's at this moment impacting Q4 as well.
Clear. Thanks for taking my questions.
Okay.
Next question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead please sir.
Yes, good afternoon. I wanted to come back on the industry outlook and then more specifically for 2016, where the VLSI forecast now go for 10% growth. If I take your Q4 guidance, then I get to something like 4%, 5% growth for Besi for the full year. Based on your comments on your strategy, I understand you're not going for market share. But could you maybe explain why you might grow a bit less than the overall industry this year?
Is there a currency effect? Are there some fast growing segments where you're less exposed? Any color there would be helpful. And then one follow-up on the costs and the OpEx. Could you maybe quantify these onetime costs in Q4 maybe to get a feel for what the underlying run rate is?
And then final question on TCB. I understand that thus far, you have not seen a broadening of applications beyond the memory cubes. Any idea where we might see that happening, that broadening of applications? Is that something that might happen in 2017? Or is that something further out into the future?
Okay. We're happy to answer. Thanks. First of all, what we hear is that also at the lower end of the market or lower end, let's say, LED market, there's a seasonal or you could say, a cyclical recovery happening at this moment because that's taking place, especially in China, so the lower cost part of this industry. And we're not that much active in LED.
Also one should note that VLSI's numbers are pretty flexible in terms of going up and down. So we still will have to see. One of the reasons mentioned in the script as well is that 2015 has been reduced. And only by that reason, the growth for 'sixteen is higher. So if you take Besi's over average growth in 2015 compared to this the contraction in 2015, you would have to take that into account as well.
But my first remark is that the you could say recovery in the lower and medium end of the market is driving this. OpEx, we mentioned some of the impacts. Consultancy cost also has to do with the preparation of a stronger ramp in China. We mentioned that building up systems, assembly and test capabilities in our own facility. And the steep ramp we currently have enjoyed and will enjoy even more so next year requires a lot of support and that is temporary support.
But we can also give you the bridge. It's also in the presentation from our average levels in SG and A and to build a bridge to our guidance. So Kare, that is on Slide
Yes. If you look at the baseline operating trends, you see some of the costs that are fluctuating. We take those out because they are fluctuating to come to a baseline OpEx. These costs for the to that are utilized for the ramp in China are then in the baseline. And if you look at the baseline Q1, Q2, you see already some increase for those kind of expenses Q2, Q3.
You can say that a significant part of the increased sort of uptick as called early in Q4 has to do with those expenses.
Okay. That's helpful.
On the third question, PCB, very important to understand at this moment. TCB is substrate related assembly. Again, it's a step further up the ladder compared to flip chip, also with TSV and stacking memory onto logic. There's a very strong development currently also in the wafer level arena and that is to somewhat competing with the single die TCB on substrate. So there are more battles going on than only the cost reduction in TCB and improvement of the yield.
Will next year be a strong year? It's hard to forecast that. But it proves once again that these new technologies, same goes for EWLB, similar to when flip chip was introduced, the start is very slow. Focus is more to stretch the current technologies because of cost similar to the wirebond processes still used very broadly. It could very well be that next year we would see a ramp, but that all depends on the yields we achieve for the major volume customers so far.
And that is what will be more clear in the first and second quarter next year. But so far so good. We're doing very well on both fronts. TCB, we have an solid installed base and development with several customers. On EWB, as we mentioned, we've made a major expansion in that developing market in the second half of this year in particular.
So Besi is very well positioned.
Okay. That's helpful. One final question on plating and then especially on solar. Could you maybe shed some light on the progress there and whether that could be an area with decent growth in 2017?
So there is also completing on its way to complete a year of major proof of concept in volume of solar using copper as opposed to silver. It looks very promising and it could well be that next year for expansion of solar capacity worldwide, we will see more investments in our plating technology. But also here, you must realize there's a huge installed base today using silver and the solar world being far more competitive than the semiconductor world, one cannot imagine replacements, but it's more the expansion of the capacity where our chances are growing.
Okay. Thank you.
And there's a question from Mr. Phillips Holte, Kempen. Go ahead please.
I have a question regarding your new share buyback and the reasoning behind it. I mean, did you also think about maybe paying a special dividend or doing something on your dividend policy? Because I mean, I can imagine that at today's valuation, I'm not sure if a share buyback is really the most efficient way to return cash. I was wondering if you had any thoughts on that.
Yes, we certainly have thoughts on that. First of all, as a baseline for independent growth and strategical challenges going forward, About a quarter of our revenue in net cash is, let's say, what we adopt as being very important. Everything on top of that is available to return to shareholders either through a dividend or share buybacks. If you have made the math in the last 12 months end of September, we have generated close to €90,000,000 net cash by paying out the dividend over 2015 and the buyback program as mentioned in the script. And our net cash at the end of September at close to 132,000,000 And the guidance for Q4, we will be looking at year end again at a cash surplus in that calculation, which should be somewhere above €70,000,000 Our dividend policy is well known between 40% 80% of net cash net income is available for dividends.
Last year, we did a special dividend, which then lifted the payout to 94% of net income. Again, it's too early to come to conclusions on dividend proposals. We do that when we have the year end numbers audited. So that will be in February. But if you take the overall cash situation, it certainly presents possibilities along both ways to return cash to shareholders.
On your remark of the current share price, whether share buybacks are advisable. It's all a matter of if you look at future perspectives and the possibilities of Besi's strategy, And we want to stay away from those considerations as a company because the share buyback program as we have carried that out in the last year, we are every day in the market buying shares whether the share price is at any level is not important. It is how we return excess cash to shareholders. So in other words, we are not an active participant in the market. But that is what I can say.
So a few benchmarks again in that sense. So onefour of revenue as a baseline for independent future execution of our strategy in every direction. And everything on top of that is available for dividends and share buyback. Does that answer your question?
Yes, it does. Thank you very much.
The next question is from Mr. Nigel van Putten, ING. Go ahead please.
Yes, hello again. Just a follow-up, more technical and of a background nature. But so we've discussed in FID chip and TCB and EWLB. But another trend, at least I'm reading a lot about, is towards system and package as the shrink on the system and chip just becomes too expensive. So do you see that as an underlying driver of the advanced packaging market?
And maybe besides this trend, what are exciting prospects or things that are currently happening that you expect to drive the market longer term?
Well, system in package is not new. It's already is very, I would say, old. And we are since many years very active in that area. And one of the systems, the EVO, is a multi chip platform, up to 6 and now also up to 8 different components it can place. And if you also look at camera lenses for that method, they are also multi component assemblies.
And that's what is referred to then as a system in a package. There are, of course, views that can go much further. For instance, imagine a smartphone not consisting any more of 100 plus components, which used to be more than 500. But if all those could go into one package, you would have 1 system in a package, which is very attractive from the overall functionality of a circuit. So that direction is a very important direction in the same way as the ones you mentioned before.
So at the very forefront of technology, testing, what can we eliminate? I haven't said that yet. So if you imagine that you place multiple components without a carrier substrate or lead frame for that matter into one package, that is something which reduces the cost, also brings the circuitry down to much smaller geometry, so less energy used to drive the whole system. So that's once again a very important technology field for many years and going forward. The iWatch for instance and or smartwatch for that matter is also assembled in one package.
That's a system in one package.
Yes, exactly. I mean towards the IoT, I was actually hinting on the smart not smartphone, but the smartwatch. And as I heard the new release by Apple also contained multiple system on chip no, system in package this time around. And I know you guys are exposed through multiple machines. So I was just therefore asking the questions on the SIP.
Yes. Very important. Clear. Thanks.
Thanks.
The next question is from Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead please.
Yes. I had a follow-up on EWLB and fan out wafer level packaging. You mentioned EWLB earlier in your remarks and that it had seen a nice increase this year. Were you then referring to bonding tools? Or is it also relating to molding, for instance, and singulation?
It is both bonding and so placing the chips in a larger spacing because that's what EWP does. And then molding the fan out wafer into a carrier and that is done by a molding process. Singulation is a different tool at this moment, which we don't supply in that dimension yet. That may come in the future. But the 2 horses for us in that race are very accurate chip placement below 5 micron at a very high speed, higher than any comparable in the industry and the molding.
Okay. And of course, there has been a lot of press reports about Apple TSMC using what TSMC calls info. Can you confirm that the interest and the traction that you have is broader than that? It's more than just one company? You see multiple clients working on this?
Yes, yes, yes, yes. And also with multiple subcontractors. And so it's not only TSMC, but ASE, EMCOR, Stuttgart, the big ones are all going into that direction for principal customers.
Yes. Okay. Thank you.
There are no further questions at the moment.
Well then, I thank everyone for participating in the call. And in case you have any further questions, don't hesitate to contact us. Thank you all. Bye bye.
Ladies and gentlemen, this concludes the BC event call. You may now disconnect your line. Have a nice day.