Good morning. Good afternoon, ladies and gentlemen, and welcome to the B. Syma Conductors Quarterly Conference Call. The audio webcast to discuss the company's 2016 Q1 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 Teanepe, Senior Vice President, Finance. As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without the 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 going into the earlier today, and then we'll take questions. I would like to remind everyone that some of the comments made during this call as 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 4th quarter ended March 31, and also spend some time updating you on the market, operating results and outlook. First, some overall thoughts on the past quarter. Q1 2016 Besi realized solid revenue and operating profit levels that net expectations were continuing to increase its net cash position. Revenue grew by 1.5% versus Q4 last year with market conditions formed and business increased for certain smartphone applications. Gross and net margins of 49.2% 10.1% were attractive from an industry perspective, both significant H2 twenty fifteen order downturns.
Net cash continued to build reaching a record level of €138,400,000 In addition, we enhanced shareholder value via spare repurchases, aggregating €5,200,000 in Q1 €9,200,000 since program in September last fall, which represent the positive result of Baesys current 1,000,000 store repurchase authorization. Orders grew significantly by 34.4% versus Q4 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 export plant packaging capacity has helped improve Greys' first half twenty fifteen business in April. From a strategic perspective, initiatives continue to increase revenue generation and the profitability of Besi's business model. Actions include developing enhancements to TCB and wafer level processing systems, expanding Dibon in production for the local Chinese market, increasing the capabilities of lasers in Singapore, Biogen and Development Center and transformed diastolic production from Europe to Malaysia.
With that, I'll turn the call over to Corte Henpe, our senior Vice President of Finance.
Okay. Thank you, Richard. Besi's Q1 'sixteen revenue growth was slightly above the midpoint of prior guidance, primarily due to strength in sales, certain die attach and packaging systems for a variety of smartphone applications. The 16.8% decline versus Q1 'fifteen was broad based due to the H2 'fifteen industry downturn. Q1 2016 orders grew to €103,900,000 as we experienced strong demand by Chinese and Chinese 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 Q1 of 2016 by €25,700,000 or 79%, while IDM orders increased by almost €1,000,000 or 2%. Basis gross margin in Q1 decreased by 0.8 points versus Q4 'fifteen, but came in above our prior guidance range of 47% to 49%. Sequential decrease was due to charges of €300,000 related to European restructuring activities and increased personnel costs in support of higher order levels.
Gross margins increased by 0.2 points versus Q1 'fifteen due to material cost efficiencies and net ForEx benefits from changes in valuation of the U. S. Dollar and Malaysian ringgit versus the euro. Such positive factors were partially offset by the absence of net restructuring benefits of €700,000 in Q1 'fifteen. Besi's Q1 2016 operating expenses increased by €2,700,000 or 10.2 percent in comparison to Q4 'fifteen and in line with guidance of plus 10%.
The increase was primarily due to increased incentive compensation expense of €2,500,000 as we had indicated last quarter. Baseline operating expenses, excluding the impact of ForEx, R and D capitalization and amortization, restructuring and variable pay grew by €900,000 or 4%. This was mostly due to higher personnel and variable costs associated with higher order levels. Continuing the 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 'fifteen, 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 financial effect to be seen in our Q3 results. Besi's net income decreased by €1,700,000 versus Q4 'fifteen 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 'fifteen to 14.6% in Q1 'sixteen. We continue to be a strong cash generator and have a solid balance sheet. Besi generated cash flow from operations of €20,000,000 in Q1 'sixteen, which was utilized primarily to fund €5,500,000 of share repurchases, €1,800,000 of capitalized development spending and €900,000 of net capital expenditures.
Net cash grew by €11,900,000 since year end. During the quarter Besi repurchased almost 270,000 ordinary shares at an average price of €19.28 per share. Cumulatively, as of March 31, 2016, we had completed roughly half of our proposed 1,000,000 share buyback at an average price of €18.62 And with that, I'll turn the presentation back over to Richard.
Now I'd like to spend a couple of moments I've given you on the market and our strategic priority. Last quarter, we gave a wide revenue guidance range given the second half initial downturn and global macro uncertainty in the Q4. The tone of the assembly equipment market turned at the end of Q4 and continued stable to positive in Q1 this year. Even so, Vivo Zao has not yet changed their forecast for a modest assembly equipment downturn in 2014, 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 this top half will work as yet.
ELSI expects the assembly market to be much better in 2017 and 2018 given the new technology software underway focusing on sub-twenty nanometer geometries at the major supply chain. We've updated our share of wallet target for the year in 2015 to give you an idea of small market. We go through these market share developments as 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 the increased share in 2015 had a number of important role taken from customers, both at the subcontractor and IDM levels, continuing a favorable trend since 2012.
The next chart highlights the many activities underway at Besi to improve its top line and open line results. From a development perspective, our key focus right now is to further our lead in both TCB and wafer level bonding to capture future growth in some of these promising areas. In addition, we're working on a refresh of many of our data tracing 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, post increasing their accuracy to a tolerance of 4.3 micron or 3 microns in the second half of last year. From an operating perspective, key priorities include tailing production to meet projected Q2 revenue levels and increasing local drybondin production for the China Sea.
This latter initiative has already yielded benefits in terms of increased Q1 orders. In addition, we are finalizing the personnel ramp at Beijing's Singapore Dryadust Development Center, completed in 20 15 European headcount initiatives and transferring our remaining value added investment from Europe to Malaysia. So many exciting things that led us this year and many opportunities still to increase the profitability of our business model. Now a couple of words about our guidance for the Q2 this year. Q2 guidance calls for revenue to increase by 20% to 25 percent versus the €79,000,000 reported in the Q1.
Gross margins to range between 48% and 50 percent 50% versus the 49.2% realized in the Q1 and for operating expenses to increase by 0% to 3% versus the €29,200,000 reported in the Q1. As a result, we anticipate that differential operating profit will increase significantly as revenue grows strongly, gross margins remain at attractive level and overhead rose slowly relative to revenue development. That ends our prepared remarks. I would like to open the call for some questions.
The first question comes from Peter Olesund from Kepler Cheuvreux. Please go ahead, sir.
Good afternoon. Actually a couple of questions, so maybe best to do it 1 by 1. 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 combination of both?
The answer to the first question is that it is strength from the local and its top contractor center.
Okay. And is it then fair to assume that it's mainly linked to the work they do for Chinese handset makers? Or do they also surface some of the larger international brands?
It's a combination, but the emphasis in this round is on shining manufacturing.
Okay. That's clear. Then 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 are ordered or having to delay new orders? Have you seen any impact from that?
Yes. We have seen impact, but more in a positive sense because capacity ramp has shifted to other factories and in particular, in factories in China.
So that partly explains then the strength you saw
there? That's for the part which is not for local service.
Okay. Then 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? And may we see a pickup there later this year?
Well, we received in the Q1 both orders for EWU at an higher amount than which we released in the press release in December. And also, we received continue on orders for TCB.
So across the range of technologies, you are seeing positive momentum then?
Yes. But still, in terms of these plans, to be very clear, although it's a beautiful number of machines, but the production volume is very low. So we are in the initial first stage of this technology market acceptance. And it could take well the rest of this year before that becomes a mainstream production capacity buildup. So that could then lead to multiple more orders.
And this is going to be seen. Okay.
And what's the decisive factor there then? Is it the need to further improve the manufacturing yield?
Number 1 is yield. And number 2 is the unavailability of the existing facility for the next round. So 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
Okay. And what new technology is needed then? What's then cost?
In general, both TCB with through hole interconnect TSB, yes, replaces TEC memory onto logic. And the performance should, 1st of all, outperform the existing technology based on flip chip. But also from a yield and reliability point of view, it has to be at least effective that is just a part of the market. For EWB, that's a wafer level packaging solution, so no substrate with you. And the question is, is that yield comparable to the higher cost of the processes needed for an EWB solution as opposed to a split rate interconnect solution using friction.
So yes, it was an exciting time. 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?
Yes. But careful, the main the first part of the sentence is correct because that's also what we saw in Q1. Again, expansion in fixed rate based fixed solutions. And further, we would take product efficiency 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, but maybe any color there?
Yes. To start with Poland, we have installed the 2 major customers for conducting tools for 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 and 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. So last year, roughly 18% of our revenue was automotive relabeled. And in Q1, we see a similar trend.
Okay. Then my final question that relates to the molding business you have and that specifically related to wearables and smartwatches. Are there any new product introductions in the pipeline that may need new modeling technologies?
Well, we are somewhere at the important points for the rollout of the 2nd generation watches. It's difficult to see how that will be received. We were a bit disappointed by, yes, 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.
But that being said, we don't see a major rollout underway. Will that change? Who knows? We are involved heavily in several leading products, also with molding, and that could very well develop positively.
But a bit early still to know for sure, I understand.
Yes.
Okay. Thank you very much. The
next question comes from Hans Slop from Raperbank. 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? And do you expect the segment to grow as a percentage of sales in 2016?
First of all, yes, we will become more positive in Q1 compared to the second half last year, albeit in terms of landscape growth, particularly in China. However, the predictability of the market is very difficult. And it's too early to tell how that will be done in the rest of this year, what type of Chinese manufacturer. In other words, how successful will be the next round of handsets from the major leaders in this sector. But we were definitely positively surprised by the order levels in Q1.
Okay. Thanks. That's helpful.
The next question comes from Philipp 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, 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?
And 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 stack memory markets. 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.
Yes. If you look at OpEx, we said in Q4 that the increase and 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. And we also indicated for Q2 that OpEx will be more or less flat. Expenses for the share plan will be somewhat will be already lower and will further decrease in Q3 and Q4 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.
So higher revenue levels cause usually higher warranty and also some higher expenses for commission, etcetera. So that's somewhat higher. We also indicated that the transfer for we started in Q1 will be fully completed in Q2 of 2016. So there is still some to go. But we also indicated that we are preparing for a further transfer of functions from out of Europe to Singapore.
And for that we first have to build up Singapore. So the staff in Singapore they need to be trained. And then after a certain period, we can further reduce the European headcount. And 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 within first and we have seen similar pattern in 2015. First, we have to build up in Singapore and train people and then the cost will go down further.
So the second half, we expect somewhat lower levels of OpEx compared to the first half.
Okay. And 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 improvements, although yes, the confidence is growing. But from a volume point of view, it is still relatively, let's say, development phase levels.
So the real rollout still has to come, which might happen in late 'sixteen, early 'seventeen, that's the lowest forecast.
Okay. Thank you.
The next question comes from Nigel Vampert 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 €78,000,000 and the amount going to subcontractors, and I always associated Asia Pacific with subcontractors. So could you give a bit more insight in terms of what IDMs are active in that area now and on what equipment they are ordering? And 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 50% of revenue for us and 40% is IDM. And in a recession period that turns around.
So then 60% is IBM and 40% is Super. Where is that based on? First of all, IDMs are usually focused on new product development and product introduction. Subcontractors is more than volume and development for those IDMs who are fabless. So you take away your idea that basically only is doing business with IDM is many, many years this split is a very typical split.
For the next caller, maybe you can share some more light on that.
Yes. 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. And we see something similar but to somewhat lower level in the Q2. Without that, the tax rate would be approximately 11% to 12%. So we expect for the first half tax rate of 14% to 15% more or less.
The second half, it will be more to the usual level of around 12% to 13%. So all over the year, we would expect something like 12% to 13% tax rate, of course, but depending on product mix and 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 1 in particular TSMC and I don't think you want to to maybe say too much specifically about that customer. But do you see increased order levels maybe already now and going into the rest of the year?
Yes. We certainly see focused investment on wafer level assembly technologies, which is publicized by many. And we also have a part on that. But I cannot be more specific going back.
I understand. Thank you.
Additional questions or remarks, you can still press star 1. The next question comes from Edwin de Jong from S&S. Please go ahead, sir.
Good afternoon, gentlemen.
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?
You can use as a general sentiment indicator. So they are imposing or narrowing the depth of a negative year to a flat year, maybe also in the course of the next quarter, and that will be important to follow. Maybe towards a slight growth, but sentiment has improved. Also if you look at our guidance for the Q1 and the outcome, as we mentioned also in the press release, things have improved step by step. But it's hard to tell.
We have a visibility of a quarter, a 2 month for certain products somewhat more, but it all depends on macroeconomic development as well. So the preparation for the rollout of the below 20 nano technology, which is expected for 2017, 2018, that still stands. But the status of the weapon or the intensity depends very much on what is happening in Orlando.
Very clear. Very clear. And then maybe on flip chip. How do you see your market share developing there on the high end and on the lower end? Is this is MPT still winning market share on the lower end?
Or you clearly had some very strong sales number?
Winning is a terminology which you can only use when you compete. On the very low end, we have not had any installations till date. There are some middle areas where we have been very successful to gain market share. On the high end, we not only maintain, but we have extended our market share. But that's what might be the ones mentioned earlier, both in the Peruvian.
But it's a very, let's say, ever broader landscape of lifted applications. And the question will be how that develops and going forward. Will higher efficiency be needed because that is where we do consolidate. 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.
And then 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. But when would you start considering a new share buyback program because net cash is quite high?
Well, that's the Q3. And this program runs until September. So around August, we will review the situation in total and then decide on the next round. That will be in Q3? Yes.
Very clear. Thank you. Q2 will continue as we are doing right now.
All right. Thank you.
For additional questions or remarks, you can still press star 1. 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 P and C conference call. You may now disconnect your line. Thank you for attending.