Good morning. Good afternoon, ladies and gentlemen, and welcome to the BE Semiconductor Industries quarterly conference call. The audio webcast to discuss the company's 2016 first 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 Cor te Hennepe, Senior Vice President, Finance. At this time, all participants are in a listen-only mode. Later, we'll 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 Blickman. Please go ahead, 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 we'll take 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 of first quarter ended March 31st, and also spend some time updating you on the market operating and outlook. First, some overall thoughts on the past quarter. Q1 2016, Besi realized solid revenue and operating profit levels that met expectations, while continuing to increase its net cash position.
Revenue grew by 1.5% versus Q4 last year, with market conditions firming and business increased for certain smartphone applications. Gross and net margins of 49.2% and 10.1% were attractive from an industry perspective, post significant H2 2015 order downturns. Net cash continued to build, reaching a record level of EUR 148.4 million. In addition, we enhanced shareholder value via share repurchase aggregating EUR 5.2 million in Q1 2016, and EUR 9.2 million since program inception last fall, which represent approximately half of Besi's current 1 million share repurchase authorization. Orders grew significantly by 34.4% versus fourth quarter of last year in the face of an uncertain macroeconomic environment, which has adversely affected many semiconductor producers. However, a new technology cycle is underway for sub-20 nanometer devices, which, along with increased Chinese and Taiwanese purchases of leading-edge advanced packaging capacity, has helped improve Besi's first half 2016 business outlook.
From a strategic perspective, initiatives continued to increase revenue generation and the profitability of Besi's business model. Actions include developing enhancements to TCB and wafer level processing systems, expanding die bonding production for the local Chinese market, increasing the capabilities of Besi's Singapore die bonding development center, and transferring die sorting production from Europe to Malaysia. With that, I'll turn the call over to Cor te Hennepe, our Senior Vice President of Finance.
Okay. Thank you, Richard. Besi's Q1 2016 revenue growth was slightly above the midpoint of prior guidance, primarily due to strength in sales of certain die attach and packaging systems for a variety of smartphone applications. The 16.8% decline versus Q1 2015 was broad-based due to the H2 2015 industry downturn. Q1 2016 orders grew to EUR 103.9 million as we experienced strong demand by Chinese and Taiwanese subcontractors for die attach and packaging systems used in smartphone applications. There was particular strength in bookings for flip chip and epoxy die bonding equipment. Besi also benefited from the increased IDM demand for high-end memory and cloud server applications, continuing a favorable trend started in 2015. Per customer type, subcontractor orders increased sequentially in the first quarter of 2016 by EUR 25.7 million or 79%, while IDM orders increased by almost EUR 1 million or 2%.
Besi's gross margin in Q1 decreased by 0.8 points versus Q4 2015, but came in above our prior guidance range of 47%-49%. The sequential decrease was due to charges of EUR 0.3 million related to European restructuring activities and increased personnel costs in support of higher order levels. Gross margins increased by 0.2 points versus Q1 2015 due to material cost efficiencies and net forex benefits from changes in valuation of the US dollar and Malaysian ringgit versus the euro. Such positive factors were partially offset by the absence of net restructuring benefits of EUR 700,000 in Q1 2015. Besi's first quarter 2016 operating expenses increased by EUR 2.7 million or 10.2% in comparison to Q4 2015 and in line with guidance of plus 10%. The increase was primarily due to increased incentive compensation expense of EUR 2.5 million, as we had indicated last quarter.
Baseline operating expenses, excluding the impact of Forex, R&D capitalization and amortization, restructuring and variable pay, grew by EUR 0.9 million or 4%. This was mostly due to higher personnel and variable costs associated with higher order levels. Continuing recent trends, total headcount was down 5.4% versus Q1 2015, although it increased by 3.3% versus year-end, as we started to ramp temporary Asian production personnel. European fixed headcount was down 2.9% versus year-end and 10.7% versus Q1 2015, primarily reflecting the ongoing transfer of certain logistical, software, and administrative functions from Switzerland to Singapore. We expect this transfer to be completed in the second quarter, with the full financial effect to be seen in our Q3 results.
Besi net income decreased by EUR 1.7 million versus Q4 2015 due to lower gross margins and higher incentive compensation expense, partially offset by higher revenue and the reduction in the effective tax rate from 20.6% to 15.2%. On an adjusted basis, the effective tax rate increased from 10.7% in Q4 2015 to 14.6% in Q1 2016. We continue to be a strong cash generator and have a solid balance sheet. Besi generated cash flow from operations of EUR 20 million in Q1 2016, which was utilized primarily to fund EUR 5.5 million of share repurchases, EUR 1.8 million of capitalized development spending, and EUR 900,000 of net capital expenditures. Net cash grew by EUR 11.9 million since year-end. During the quarter, Besi repurchased almost 270,000 ordinary shares at an average price of EUR 19.28 per share.
Cumulatively, as of March 31st 2016, we had completed roughly half of our proposed 1 million share buyback at an average price of EUR 18.62. With that, I'll turn the presentation back over to Richard.
Now I'd like to spend a couple of moments updating you on the market and our strategic priorities. Last quarter, we gave a wide revenue guidance range given the second half industry downturn and global macro uncertainty in the first quarter. The tone of the assembly equipment market firmed at the end of Q4 and continued stable to positive in Q1 this year. Even so, VLSI has not yet changed their forecast for a modest assembly equipment downturn in 2016, given the unevenness of the recent improvement and conditions in some end-use applications. From our perspective, visibility still remains limited, and it's difficult to assess how the second half will work out yet. VLSI expects the assembly market to do much better in 2017 and 2018, given the new technology circle underway, focusing on sub-20 nanometer geometries at the major supply.
We've updated our share of wallet chart for the year in 2015 to give you an idea of how market we go, those whose market share development are key customers engaged in the most leading-edge packaging applications. Shares can vary per annum based on customer capacity needs and development cycles. You'll note that we increased share in 2015 at a number of important die attach and packaging customers, both at the sub contractor and IDM levels, continuing a favorable trend since 2012. The next chart highlights the many activities on the way at Besi to improve its top-line and bottom-line results. From a development perspective, our key focus right now is to further our lead in both TCB and wafer level packaging to capture future growth from these promising areas.
In addition, we're working on a refresh of many of our die attach and packaging systems to improve their speed, accuracy, and reliability in a competitive market. As an example, we've already seen a significant increase in flip chip system orders, both increasing their accuracy to a tolerance of 0.3 micron or three microns in the second half of last year. From an operating perspective, key priorities include scaling production to meet projected Q2 revenue levels and increasing local die bonding production for the Chinese. This latter initiative has already yielded benefits in terms of increased Q1 orders. In addition, we are finalizing the personnel ramp at Besi Singapore die attach development center, completing 2015 European headcount initiatives, and transferring our remaining die attach production from Europe to Malaysia. Many exciting times ahead of us this year, and many opportunities still to increase the profitability of our business model.
A couple of words about our guidance for the second quarter this year. Q2 guidance calls for revenue to increase by 20%-25% versus the EUR 79 million reported in the first quarter. Gross margins to range between 48% and 50% versus the 49.2% realized in the first quarter. For operating expenses to increase by 0%-3% versus the EUR 29.2 million reported in the first quarter. As a result, we anticipate that the financial operating profit will increase significantly as revenue grows strongly, gross margins remain at attractive levels, and overhead grows slowly relative to revenue development. That ends my prepared remarks. I would like to open the floor for some questions. Over to you.
Ladies and gentlemen, we'll start the question and answer session now. To be registered for the Q&A, please press star one on your telephone. Your questions will be answered in the order they are received. If you have a question or remark, please press star one. The first question comes from Peter Olofsen from Kepler Cheuvreux. Please go ahead, sir.
Good afternoon. Actually, a couple of questions, maybe best to do it one by one. My first question relates to the order intake. You mentioned relative strength in both China and Taiwan. The strength in China, does it relate to demand from local Chinese subcontractors, or is it related to non-Chinese players setting up capacity in China, or maybe a combination of both?
The answer to the first question is that it is strength from local Chinese subcontractors in China.
Okay. Is it then fair to assume that it's mainly linked to the work they do for Chinese handset makers, or do they also service some of the larger international brands?
It's a combination, but the emphasis in this round is on Chinese manufacturing.
Okay, that's clear. Second question. Has there been any impact from the earthquake in Taiwan in February and the more recent one in Japan, in the sense that maybe some of your clients were not able to accept shipment of tools they have ordered or having to delay new orders? Have you seen any impact from that?
Yeah, we have seen impact, but more in a positive sense because capacity ramp was shifted to other factories and in particular in factories in China.
That partly explains then the strength you saw there.
Well, that's for the part which is not for local Chinese.
Okay. On eWLB, I think in December you announced an order for systems for this technology. Have you seen any further traction in eWLB or fan-out wafer level packaging so far this year? May we see a pickup there later this year?
Well, we received in the first quarter both orders for eWLB, at a higher amount than which we released in the press release in December. Also we received continuing orders for TCB.
Across the range of technologies, you are seeing positive momentum then?
Still in quantities that, to be very clear, although it's a beautiful number of machines, the production volume is very low. We are in the initial 1st stage of this technology market acceptance, it could take well the rest of this year before that becomes a mainstream production capacity buildup. That could then lead to multiple more orders. This is yet to be seen.
Okay. What's the decisive factor there then? Is it the need to further improve the manufacturing yield?
Number 1 is yield, number 2 is the unavailability of the existing technology for the next round. There has to be a crossover point which forces the rollout of the new technology, because from a cost, the new technology is more expensive than stretching the envelope of the current technology.
Okay. What new technology is needed then?
In general, both TCB, with through-silicon via, TSV, replaces stacked memory onto logic, and the performance should, first of all, outperform the existing technology. It is based on flip chip. Also from a yield and reliability point of view, it has to be at least factor, but that is to justify the higher cost. For eWLB, that is a wafer level packaging solution, so no substrate is used. The question is that yield comparable to the higher cost of the processes needed for an eWLB solution as opposed to a substrate interconnect solution using flip chip? Yeah, those are exciting times, and 2016 will be a year where we should see certain directions emerge.
To summarize then, is it then fair to say that this year flip chip will probably be the main driver, although there may be some traction also in TCB and fan-out wafer level packaging later this year?
Yeah. Careful. The first part of the sentence is correct because that is also what we saw in Q1. Again, expansion in substrate-based flip chip solutions, and further, I would say qualification for TCB and wafer level application.
Okay. Could you maybe shed some light on what you're seeing in solar and automotive? You did not specifically mention these areas in your press release. Maybe any color there?
Yeah. To start with solar, we have installed at two major customers the production tools, so copper replacing silver. As we have said several times, 2015 will be the qualification year. If things go as they are progressing right now, they are developing very well, that could lead to next orders in the second half of this year. For automotive, things are going well. It's tied also to the general economic development. Last year, roughly 18% of our revenue was automotive-related. In Q1, we see a similar trend.
Okay. My final question that relates to the molding business you have, that's specifically related to wearables and smartwatches. Are there any new product introductions in the pipeline that may need new molding technologies?
Well, we are somewhere at the important point for the rollout of the second-generation watches. It's difficult to see how that will be received. We were a bit disappointed by the information recently. It doesn't seem to have great traction yet, although some big data numbers, the amount of wearables last year already exceeded by far the production of all Swiss watches. That being said, we don't see a major rollout on the way. Will that change? Who knows? We are involved heavily in several leading-edge products, also with molding, that could very well develop positively.
A bit early still to know for sure, I understand.
Yeah.
Okay. Thank you very much.
For additional questions or remarks, you can still press star one. The next question comes from Hans Slob from Rabobank. Please go ahead, sir.
Yes, thanks. I've got a question related to the smartphone segment. You saw orders improving, primarily based, also driven by those Chinese handset manufacturers. Has Besi become more positive on the smartphone segment for 2016 since the previous quarter? Do you expect the segment to grow as a % of sales in 2016?
First of all, yes, we've become more positive in Q1 compared to the second half last year, albeit in terms of landscape growth, particularly in China. The predictability of that market is very difficult, and it's too early to tell how that will develop in the rest of this year outside Chinese manufacturers. In other words, how successful will be the next round of handsets from the major leaders in this sector. We were definitely positively surprised by the order levels in Q1.
Okay, thanks. That's helpful.
The next question comes from Philip Scholten from Kempen. Please go ahead, sir.
Yes. Good afternoon, everybody. First of all, a question on your operating expenses. I maybe would have hoped that given the cost-saving initiatives you initiated late last year, that would decline a bit more. Can you maybe give some more guidance as to that level going into the second half of the year? My second question relates to the strength you mentioned in the press release of the high-end memory and cloud server applications market. I think that last quarter you said that it was early days for the stacked memory market. Has that changed, or has the Q1 actually benefited from an initial batch of deliveries related to that market, or do you believe that traction is actually improving for that segment?
Let's first answer the OpEx in some more detail.
Yeah, if you look at OpEx, we said in Q4 that the increase, we also say it now in our press release and conference call, the increase is mainly due to the expenses related to the share plan. We also indicated for Q2 that OpEx will be more or less flat. Expenses for the share plan will be already lower and will further decrease in Q3 and four because what we call discretionary shares are then out of our costs. We see a small increase in Q2, basically based on costs that are related to higher revenue. Higher revenue levels cause usually higher warranty and also some higher expenses for commission, et cetera. That's somewhat higher. We also indicated that the transfer we started in Q1 will be fully completed in second quarter of 2016. There is still some to go.
We also indicated that we are preparing for a further transfer of functions from out of Europe to Singapore. For that, we first have to build up Singapore. The staff in Singapore, they need to be trained, and then after a certain period, we can further reduce the European headcount. The fact that OpEx is now decreasing maybe a little bit less than expected, has to do with this initiative to further reduce the cost in Europe. We have seen a similar pattern in 2015. First, we have to build up in Singapore and train people, and then the cost will go down further. The second half, we expect somewhat lower levels of OpEx compared to the first half.
Okay, to the second question, has our visibility changed in the positive sense? The answer is no. As I responded to an earlier question, we still see that there's a lot of market acceptance, yield improvement. The confidence is growing, but from a volume point of view, it is still relatively, let's say, development phase levels. The real rollout still has to come, which might happen in late 2016, early 2017. That's the latest forecast.
Okay. Thank you.
The next question comes from Nigel van Putten from ING. Please go ahead, sir.
Hi. Afternoon. Most of my questions have been answered. I did notice in the order book there's quite a big discrepancy between the Asia-Pacific total order number, which is about EUR 78 million, and the amount going to subcontractors. I always associated Asia-Pacific with subcontractors. Just to give a bit more insight in terms of what IDMs are active in that area now and on what equipment they are ordering. The second question is, what type of, or what is the tax rate for full year we should assume?
Let me answer the first question. In the order book, the split between subcontractors and IDMs vary, and that depends on where we are in the cycle. If there is a volume expansion, subcontractors on average have about 60% of revenue for us and 40% is IDM. In a recession period, that turns around. 60% is IDM and 40% is subcon. Where is that based on? First of all, IDMs are usually focused on new product development and product introduction. Subcontractors is more the volume and development for those IDMs who are fabless. To take away your idea that ASML only is doing business with IDM, it's many, many years, this split is a very typical split.
For this tax quarter, maybe you can share some more light on that.
Yeah. The tax rate, first of all, if you look at the tax rate in Q1, that's 15%. That is affected by, and that's a technicality, the costs for the share, for the LTI plan, for the share-based plan for personnel, because those costs are related to shares and therefore not tax-deductible. We see something similar, but to a somewhat lower level in the second quarter. Without that, the tax rate would be approximately 11%-12%. We will expect for the first half a tax rate of 14%-15%, more or less. The second half, it will be more to the usual level of around 12%-13%. All over the year, we would expect something like a 12%-13% tax rate, of course, but depending on product mixing with that, the jurisdiction. But that would be the annualized expected tax rate.
Thanks. Maybe just to clarify on my first question on the Asia Pacific IDMs, I was thinking of one in particular, TSMC. I don't think you want to maybe say too much specifically about that customer, do you see increased order levels maybe already now and going into the rest of the year?
Yes. We certainly see a focused investment on wafer-level assembly technologies, which is publicized by many. We also have a part in it. I cannot be more specific than that.
I understand. Thank you.
If you wish to ask additional questions or remarks, you can still press star one. The next question comes from Edwin de Jong from SNS. Please go ahead, sir.
Good afternoon, gentlemen.
Good afternoon.
A couple of questions from my side. Maybe looking a little bit ahead to Q3 and Q4, has your feeling about those quarters changed in the course of last quarter, or are you getting more optimistic or are you getting more pessimistic? Something like that.
If you look at the VLSI, which you can use as a general sentiment indicator, slowly they are improving or narrowing the gap of a negative year to a flat year, and maybe also in the course of the next quarter, and that will be important to follow. Maybe towards a slight growth.
Okay.
Sentiment has improved. Also, if you look at our guidance for the first quarter, and the outcome, as we mentioned also in the press release, things have improved step by step. It's hard to tell. We have a visibility of a quarter to a month. For a certain product, somewhat more, but it all depends very much on macro-economical development as well. The preparation for the rollout of the below 20 nanometer technology which is expected for 2017, 2018, that still stands. The size of that or the intensity depends very much on what is happening around us.
Very clear. Maybe on flip chip, I don't know, how do you see your market share developing there on the high end and on the lower end? Is ASMPT still winning market share on the lower end, or--
Well-
You clearly had some very strong sales numbers
winning is a terminology that you can only use when you compete. On the very low end, we have not had any solutions till date. There are some middle areas where we have been very successful to gain market share. On the high end, we not only maintained, but we have expanded our market share, but that's not so much against the ones mentioned earlier, both Korean. It's a very, let's say, ever broader landscape of flip chip applications, and the question will be how that develops going forward. Will higher accuracy be needed? Because that is where we differentiate ourselves. Accuracy and speed.
Sorry, I didn't get the last.
Accuracy and speed. If there's no accuracy required, and then we're talking about above 10 micron, that is not our ballgame. Our ballgame is below 6, 7 micron down to 3 micron.
Okay. Maybe lastly, you're now around the half of your buyback program. Of course, there's going to be a lot of cash out in the second quarter related to dividends and also a little bit of the remaining share buyback program, when would you start considering a new share buyback program? Net cash is quite high.
Well, that's the third quarter, and this program runs until September. Around August, we will review the situation in total and then decide on the next round.
That will be in Q3.
Yeah.
Very clear. Thank you.
Q2, we continue as we are doing right now.
All right. Thank you.
For additional questions or remarks, you can still press star one. There are no further questions. Please continue.
Thank you very much all for listening and your questions. Any further, you know where to find us. Have a good weekend. Bye-bye.
Ladies and gentlemen, this concludes the BE Semiconductor conference call. You may now disconnect your line. Thank you for attending.