Good morning, good afternoon, ladies and gentlemen, welcome to BE Semiconductor's quarterly conference call and audio webcast to discuss the company's 2016 second quarter results. The audio webcast is available on Besi website, www.Besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer, and Mr. Cor te Hennepe , Senior Vice President of Finance. At this time, all participants are in listen-only mode, later we'll conduct a question and answer session, 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 of the company. I would now like to turn the conference 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, then we'll take your questions. I would like to remind everyone that some of the comments made during this call, 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 second quarter and first half year, also spend some time updating you on the market, our strategy, and the outlook. First, some overall thoughts on the past quarter. Besi achieved a 38% quarterly sequential revenue increase in Q2, a tripling of the net income to EUR 24 million, and peer-leading gross and net margins.
This strong performance was due to a favorable market environment, increased customer acceptance of Besi's leading-edge and mainstream assembly solutions, benefits of operating leverage in our business model. Revenue was above prior guidance, primarily due to earlier-than-anticipated systems deliveries to Asian customers, which we originally scheduled for Q3. Net cash of EUR 110.7 million grew by 21.1% over the second quarter last year, as we scaled revenue rapidly and improved cycle times to meet increased customer demand. In addition, Besi continues to enhance shareholder value via the payment of cash dividends to shareholders and regular share repurchases under our current buyback authorization. In Q2 2016, sequential revenue growth was broad-based across the product portfolio, primarily reflected an expansion of advanced packaging capacity by Asian subcontractors. In addition, we experienced increased demand for die bonders and fan-out wafer level bonders.
Revenue growth resulted as well from the favorable influence of a new technology cycle, which we first saw in the first quarter of this year, an expansion of our customer base in the major supply chains, continued growth in automotive applications. The 200% sequential profit increase also resulted from stable operating expense development, despite the revenue ramp, a lower effective tax rate. For the first half year 2016, Besi's adjusted net income increased by EUR 2.3 million versus the first half of last year to reach EUR 31.8 million, even despite a 5.6% year-over-year revenue decrease. First half 2016 operating results benefited from our market position, continued improvement in material and labor efficiencies, reduced European overhead from the transfer of additional organizational functions to Asia.
At present, Besi's strategic priorities include the expansion of our Singapore die bonding engineering and Chinese production capabilities, further enhancement of our Asian supply chain, and implementation of common platform designs. Such initiatives offer additional opportunities to increase the operating leverage and profitability of Besi's business model. With that, I'll turn the presentation over to Cor te Hennepe, our Senior Vice President of Finance. Cor.
Okay. Thank you, Richard. Besi's second quarter 2016 sequential revenue increase was due primarily to increased demand by Asian subcontractors for our assembly solutions, including epoxy die bonders and fan-out wafer level bonders. Revenue rose 4.5% versus the second quarter of 2015, as Asian customers increased demand for mobile and automotive applications. Orders decreased by 3.3% versus the first quarter of 2016, increased by 9.4% versus Q2 of last year. The sequential decrease was due primarily to lower demand for die bonders for cloud server and certain mobile applications. Per customer type, subcontractor orders decreased sequentially by EUR 8.3 million or 14.3%, while IDM orders increased by EUR 4.9 million or 10.7%. For the first half year, Besi's revenue decreased by 5.6% as sales declined for smartphone and other advanced packaging applications.
The first half year of 2016 orders grew by 4.2% versus the first half of last year due to a renewed capacity built by Asian subcontractors. Overall, their mix in our order book increased from 45% in the first half of last year to 53% over the first half of this year. Besi's gross margin in Q2 2016 increased by 1.7 points sequentially to 50.9% and was above prior guidance. We continue to operate at the high end of our gross margin target range. The increase this quarter was primarily the result of our enhanced market position, as well as improved labor efficiencies and reduced restructuring costs. Margins were negatively influenced by increased material and freight cost, mostly from an increase in the Malaysian ringgit and the Swiss franc versus the euro.
Gross margin also increased by 3% versus the second quarter of 2015, and by 1.8% in comparing the first half of this year to the first half of last year. Besi's Q2 '16 operating expenses were roughly flat versus the first quarter '16 and better than anticipated. On a reported basis, lower sequential incentive compensation, facilities and restructuring expense was offset by increased Asian personnel and other variable expenses related to higher sales volumes. OpEx decreased by 9% versus the second quarter of last year, due primarily to a 13.1% decline in European and U.S.-based personnel and related overhead costs. Excluding variable pay, restructuring, and Forex impacts, you can see that Besi's baseline expenses continue to trend between EUR 22 million and EUR 25 million per quarter, with Q2 '16 being at the upper end of the range due to higher sales levels.
Besi's net income tripled versus the first quarter of 2016, due primarily to the strength of Besi's product portfolio, combined with stable expense development and a reduction in our effective tax rate to 6.9%. It also underscores the operating leverage in Besi's business model. Net margins jumped to 22% versus 14.8% in the second quarter of last year, and even exceeded peak cyclical net margins of 19.7% in Q2 2014. The effective tax rate has varied quarterly depending on the profit mix of our legal entities, but typically ranges between 10% and 15%. This quarter, the tax rate was influenced by a EUR 1 million upwards revaluation of net operating loss carryforwards at Besi Switzerland, without which the tax rate would have been 10.8%.
After adjusting for the EUR 3.5 million of net restructuring benefits in the first half year of 2015 versus EUR 0.8 million of restructuring charges in the first half of 2016 and the Q2 2016 tax benefit, Besi's first half year 2016 net income increased by EUR 2.3 million compared to the previous half year of last year. As a result, adjusted net margins increased to 16.9% versus 14.8% in the first half year of 2015. At the end of Q2 2016, Besi's cash and cash equivalents decreased by EUR 37.7 million compared to Q1 2016 to reach EUR 132.1 million due to the payment of EUR 45.4 million of dividends. Excluding the dividend payment, net cash actually increased by EUR 7.7 million sequentially, which is notable given the 38% sequential revenue ramp.
As compared to Q2 last year, Besi's net cash increased by EUR 19.3 million or 21.1%, even despite a more rapid revenue trajectory this first half year. This was mostly due to a 16% reduction in inventory levels year-over-year. Inventory management has benefited from the move to Asia, basic supply chain initiatives, and faster cycle times. Net cash levels in the second quarter of 2016 also reflect the repurchase of 227,500 ordinary shares for a total of EUR 5.6 million. Since program inception last fall, Besi has purchased a total of 723,000 shares under its 1 million share repurchase authorization at an average price of EUR 20.44 per share, for a total of EUR 14.8 million. With that, I'll turn the presentation back over to Richard.
Thank you, Cor. I'd like to spend a couple of moments updating you on the market and our guidance for the third quarter. The market tone in the first half of this year was more positive than analysts originally anticipated. VLSI Research now forecast assembly equipment market growth of around 1.1% for the whole year 2016, versus an initial estimate of a 3.9% decline. VLSI Research forecasts a less robust second half 2016, consistent with seasonal patterns in the assembly equipment market, followed by strong growth in 2017 and 2018. Key growth drivers include an expansion of Chinese and Taiwanese capacity growth, a new technology cycle, increased spending for below 20 nanometer devices, and growth in high-end memory and power efficiency applications. Besi continues to experience excellent market acceptance for its products, a broadening of its customer base, and increased share of wallet per customer.
Our customer profile looks very different now than it did three to five years ago, with much larger volume orders from all the major players and increased penetration of Chinese, Japanese, and Korean accounts. In Q2, we had great success not only with our most advanced fan-out wafer level bonders, but also with our epoxy and flip chip bonders and molding machines for smartphone, handset, automotive, and lighting applications in a more mainstream market. This is an important Besi market initiative. In addition, as you can see on this chart, we have continued to gain share of wallet since 2012 at both key subcontractors and IDM customers, sometimes even reaching 100% of their estimated assembly equipment needs. Such gains underline the momentum experienced by our product portfolio. One key strategic initiative we wanted to highlight is the expansion of our Asian production capacity.
Two years ago, we decided to increase manufacturing at our Leshan, China facility in order to diversify Besi's Asian production sources and take advantage of local market opportunities. As such, we doubled our footprint to 100,000 sq ft and began epoxy and multi-module attach die bonder production in 2016 in China. The decision was made specifically to capture more local Chinese demand, enhance our local market presence, and reduce cycle times and cost. In addition, it gives us greater flexibility to maximize customer responsiveness in market upturns. Besi successfully produced and shipped 50 die bonders in the second quarter in Leshan for the Chinese market, up from 15 in the first quarter. This move has favorably influenced our first half-year results. Now a couple of words about the guidance for the third quarter.
At present, the industry environment for the second half 2016 appears stronger than the second half of last year, 2015. Key variables affecting Besi's second half outlook include ongoing global macro-economic uncertainties, equipment demand growth rate for below 20nm devices, and level of orders by Asian customers. Based on current backlog levels, Q3 2016 revenue is anticipated to decline by about 15%-20% versus the second quarter of this year, reflecting a typical seasonal pattern. However, expected revenue and operating profits are forecast to exceed the third quarter last year results as our products gain market share, gross margins are maintained at their first half-year levels, and strategic initiatives favorably influence overhead developments. That ends my prepared remarks. I would like to open the call for some questions. Operator?
Ladies and gentlemen, as said, 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 your question or remark. Go ahead, please. The first question, Mr. Phillips Hol from Kempen. Go ahead, please.
Yes. Good afternoon. Can you hear me?
Yes.
All right. Great. My first question is on the accelerated order or system deliveries you had in the quarter. What kind of product was that and why was it actually shipped in Q2 instead of Q3? Is there a specific reason for that? My second question is on your mentioning of the fan-out wafer level packaging. Can you indicate whether that is related to subcontractors or whether that is related to what is called OEMs or foundry producers. My third question may be a bit more bookkeeping. Is the CapEx, which was quite low in the quarter, is there any seasonal impact on that, or are you going to spend very little money in maybe the coming years on CapEx?
Okay, great. First, why pull-ins? The simple reason, as explained in one of the last comments in this call, is that we are able to ramp faster than we have been in the past. Then you have to consider, for instance, epoxy die bonders. We are able to deliver within four weeks. In the past, those deliveries would take six weeks, and that helped us basically to satisfy customer demand and their preparation for capacity expansion in the third quarter. In the mainstream, the reason for the pull-in is basically our capability of delivering faster. Fan-out is from several subcontractors, orders driven by several OEMs, one of them fabless, and that is a sign of using fan-out technology for logic devices in next-generation smartphones. Why is CapEx so low? Simply because our current infrastructure is in place. We have replacement CapEx.
Also, in one of the comments, we mentioned that we have prepared the footprint in China in the last two years, and that is fully ready to be operational. There are no major CapEx programs currently.
Right. Then if I may short follow-up on the first point, it is a faster ramp from your side, and that is actually in the die bonder side.
Yeah.
Great. Thanks.
Ladies and gentlemen, for any additional questions or remarks, you may still press star one. Star one for your question or remark. Next question, Mr. Edwin de Jong, NIBC. Go ahead, please. Mr. de Jong, your line is open. Go ahead, please.
Sorry.
Maybe you have muted yourself.
I had my mute function on. Sorry. Good afternoon, gentlemen. Just a few questions left. I was reading through the TSMC earnings call transcript. They were quite vocal on developments in fan-out wafer level packaging, and that's quite unique for a foundry to talk about the back end. Any thoughts on that? Is TSMC maybe one of the drivers behind the demand that you see in fan-out wafer level packaging? As another question, looking at the net cash development has been excellent, of course. Are you considering additional buyback programs, or what is your way to cope with that in 2017? Those were the questions.
Okay. The first, well, there's a variety of customers who have decided to set up assembly for next-generation logic devices using fan-out wafer level packaging. We have been the first, already in 2007, to develop fan-out wafer level packaging at that time in very early stages. Of course, geometries have changed since then, but we have significant success because of already a qualified installed base at several subcontractors. In the past year, we have been successful in demonstrating further tighter specs in combination with leading market throughput capabilities. On a broader base, fan-out is doing very well. On a net cash development. Excuse me. Sorry.
Sorry. The install base is increasing. Are there many machines in high-volume manufacturing, or is it still earlier stages?
Well, in its early stages, but still multiple double-digit system orders. One could expect a further rollout, but it's still in early stages. Net cash development. Our share buyback program will end once we have reached the 1 million share buyback. That should be somewhere in September.
Based on ongoing positive cash generation, one could expect a continuation of that program.
Okay.
Once we have reached the million, we will take a decision on continuation of the program. Based on the current cash generation and our dividend policy, it should not change if this continues to develop in the second half of this year, and the outlook next year is as expected by VLSI, which we have also shared. That decision will be taken in February. You're right, the current cash position is nearly EUR 20 million higher than at the same time last year, despite a EUR 45 million dividend payout and a close to EUR 15 million share buyback. A significant cash generation.
Yeah. That's clear. It's very clear. Thank you.
The next question, Mr. Peter Olofsen, Kepler Cheuvreux. Go ahead, please.
Good afternoon. I had two questions. First of all, on the reduction of the European headcount related to the transfer of certain operations to Asia. I think the original plan was to complete that in Q2, and the full benefits being visible in Q3. Could you confirm that is on track? My second question relates to the solar business. I think in the Q1 call, you said that this year would be about customer qualification, and if progressing well, we could see follow-up orders in H2. How is that progressing?
Excellent. The move to Asia, the plan is and was that we hire additional headcount in the first half of this year, which we have done in Singapore. Slightly over 40 persons have been hired. They are currently trained in Austria, partly in Switzerland, and after successful learning curve by year-end and first quarter, a similar number of persons will become redundant in Austria, mainly, and that, of course, also depends on the development of the business. Maybe we've not explained it well enough to you in the course of this year, so we have double cost at this moment. Very interesting in Q2, we have roughly EUR 1 million double cost in our OpEx due to setting up further support functions in Singapore. That will disappear in the fourth quarter and the first quarter of next year. That's the status on further move to Asia.
Maybe to give a little more explanation, maybe the completion of the Q2 one is the first part of the moving to Singapore, that's from Switzerland. That one is in the meantime finalized, and we're now looking at further plans to reduce overhead or headcount in Europe, and that's what we are talking about now. There's 2 stages or two plans involved. The first one, which started in 2015, is now fully finalized.
Okay.
That's the Swiss part. We're now talking mainly about the Austrian part.
Exactly.
Okay. That's fair.
The second question, solar, yes, it will be very important and interesting to see whether orders materialize for solar in Q3, Q4. There's several irons in the fire. So far so good. We will report further on those developments with the third quarter.
Okay. Thank you.
Ladies and gentlemen, for any further questions, please press star one. Star one for your question or remark. Next question, Mr. Johannes Ries, APUS Capital. Go ahead, please.
Yes, good afternoon. Yes, great results again. Maybe on the forecast for 2017 and 2018 of VLSI you share, what areas of the backend market will be most maybe affected or maybe be the strongest growers in these years and How much maybe could benefit Besi from this? Is it likely, given maybe your position, is that you can outgrow the whole market? Maybe second, a short update on the TCB development. Maybe I missed it in the presentation.
Excellent. Well, you're very sharp.
Thank you, Mr. Ries, for your questions. First, 2017-2018. It will be a mix of a further expansion of current mainstream assembly technologies, so using substrates, and a rollout of several wafer level assembly technologies, and one of them being fan-out. Besi is well-positioned to benefit in both areas as we have seen this last quarter. There are no, let's say, dramatic changes expected. This industry is always pretty conservative. The bottom line is Besi should benefit well and maybe even more with our operations in Asia becoming more and more experienced. We have demonstrated that with the ramp in the last quarter also. Yeah, we are ready to benefit as much as we can from a next upswing.
Okay.
On TCB, the developments are ongoing. No big orders in the second quarter, smaller in terms of numbers of machines. Continued progress in more, let's say, cost-effective TCB production. Also here, it's early days, but we are continuing our success in the mainstream of the TCB in the memory market, the memory cube in particular, mounting that on logic devices for high-end server applications. It's fair to say that the second quarter, the big success was in the fan-out bonders and to a lesser extent in the TCB bonders.
In this upswing we discussed in the question before in 2017 and 2018, TCB could be also a driver.
Yes.
Strong driver. Mm-hmm.
Yes. Still, both fan-out and TCB are significantly more expensive than a further development pushing the envelope on the substrate flip-chip applications for those devices. The battle between what is still possible for lowest cost as opposed to what is a must to change for the next generation. We are prepared for both.
Okay, super. Thanks.
Thank you, Mr. Ries.
Bye.
Ladies and gentlemen, for more questions or remarks, you can still press star one. Mr. Blickman, there seems to be no further questions.
Thank you all for listening to the call and for your questions. If there are any more questions, you know where to reach us. Thank you very much. Bye-bye.
Ladies and gentlemen, this concludes the BE Semiconductor's second quarter 2016 results conference call and audio webcast. You may now disconnect your line. Thank you.
The conference is no longer being recorded.