Doctor. Industrial's Event Call. At this moment, all participants are in listen only mode. After the presentation, there will be opportunity to ask questions. I would like to hand over the conference to Richard Blickman and Kurt De Henneve.
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 for our Q1 ended March 31, and also spend some time updating you on the market, our strategy and outlook. First, some overall thoughts on the past quarter. Besi recorded another strong quarter in the Q1 of this year with solid revenue and earnings growth. Revenue of €94,900,000 and a net income of €17,500,000 increased by 35.6% and 149% versus Q1 last year and exceeded expectations. Similarly, net cash increased by €60,300,000 or 82.8 percent year over year to reach €133,100,000 reflecting strong profit generation and improved working capital management.
Our order book continued to develop favorably in this quarter. Orders were up 28% sequentially versus Q4 last year reflecting particularly strength in TCB systems for memory applications and some initial orders for wearable applications. Order strength also resulted from increased Asian subcontractor bookings for die attach and ultra thin molding systems for Asian handsets and automotive electronics applications. Strong growth in these areas compensated for slower growth in high end smartphone applications during the quarter as certain customers digested incremental capacity added in 2014. Besi's favorable Q1 order trends also reflect continued share gains in our addressable assembly equipment markets in an environment less favorable than 2014.
Besi's Q1, 2015 financial performance was stronger than anticipated. Revenue and gross margin significantly exceeded prior year results primarily due to broad based revenue growth in our equipment portfolio. And materials cost efficiencies, the depreciation of the euro versus the U. S. Dollar and a one time restructuring benefit.
Such favorable developments more than offset cost and expense headwinds from a roughly 14% average quarterly year over year increase of the Swiss franc versus the euro and higher incentive based compensation due to a 166% increase in our quarter end stock price versus the prior year. As a result, net margins increased to 18.5% in the Q1 of this year versus 10% in the Q1 of last year, reflecting the continued profit enhancement of our business model. With that, I'll turn the presentation over to Cor for more color on our financial results. Okay. Thank you, Richard.
Besi's 6 point 6 sequential revenue increase versus Q4 of last year was above prior guidance primarily due to a 10.8 percent increase in the U. S. Dollar versus the euro during the period. The 35.6% increase versus Q1 2014 was primarily due to broadly increased sales of die test systems for smartphones, Asian handsets, intelligence automotive electronics and memory applications and benefits from the depreciation of the euro versus the U. S.
Dollar. Orders increased favorably in Q1 2015 rising 28% sequentially due primarily to higher bookings of TCB systems, initial orders for wearables applications and stepped up demand by Asian subcontractors for Asian handset and automotive electronics applications. Sequential subcontractor orders more than tripled increasing by 32,700,000 this quarter, while IGM orders decreased by €9,900,000 or 15%. Orders declined by 6.2% year over year due to primarily lower packaging and plating systems bookings. Titus orders were relatively flat as compared to exceptionally high levels in Q1 2014.
In addition to higher than anticipated revenue growth, gross margins also expanded above guidance this quarter reaching a record 49%. Such level was 5.2% higher than Q4 2014 and 6.7 points higher than Q1 2014. The large sequential increase was due to a number of factors including a 2.4. Gain from net foreign exchange benefits, improved material cost margins, lower inventory provisions and net restructuring benefits of €700,000 As compared to last year, the 6.7. Improvement reflected similar underlying trends as experienced in the current sequential period.
As mentioned during our last call, we decided in Q1 2015 to transfer certain functions and personnel from our Swiss dieters operations to our Singapore facility. This action resulted in a total net pre tax restructuring benefit of €3,700,000 consisting of a pension related curtailment gain of €5,300,000 partially offset by restructuring charges of €1,600,000 The transfer is expected to occur by the end of Q4 2015 to significantly reduce our Swiss franc exposure and result in annualized cost savings of approximately €6,500,000 Excluding restructuring benefits, Q1 2015 operating expenses were €28,300,000 an increase of €3,700,000 and €6,800,000 respectively versus Q4 2014 and Q1 2014. Sequential expense growth was due to primarily a variety of factors including €1,700,000 of higher expenses from the increase of the Swiss franc versus €900,000 of increased incentive compensation expense, lower R and D grants of €700,000 lower capitalized R and D of €600,000 and as you can see on the slide, adjusted expense growth versus last year reflected similar underlying trends as experienced in the current sequential period. Given our solid revenue growth, strong operating leverage and favorable ForEx tailwinds, net income and margins have been reaching record levels in recent quarters. In Q1 2015, net income of €17,500,000 more than doubled Q1 of last year.
Net margins were 18.5% versus 10% last year. Adjusting for the restructuring benefit this quarter and the deferred tax benefit last quarter, net income was €14,200,000 in Q1 2015, up €2,000,000 versus Q4 14 and still double Q1, twenty fourteen. Effective tax rate in the Q1 was 12.9% as compared to 14% in Q4, extra deferred tax benefit. We think a rate of about 10% to 12% is reasonable this year is the current mix of business. And now a few words about our liquidity.
We had a strong cash generation this quarter wherein our cash increased by €26,200,000 versus last quarter of last year to reach 100 €161,600,000 and net cash increased by €15,100,000 to €133,000,000 As compared to March 31 last year, Beige's net cash position increased by more than €60,000,000 We have a substantial cash base to finance our development programs and strategic initiatives even post the proposed May 2015 cash dividend payment of approximately €57,000,000 And 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. After strong growth in 2014 of approximately 24%, VLSI forecast much more muted growth of 3.4% in 2015. As in recent years, we anticipate quarterly order fluctuations due to the seasonality of our business, although our visibility for H2 this year is limited at this point. In the long term applications such as smartphones, intelligent automotive electronics, the Internet of Things, wearable devices, memory and streaming video content should further push demand for our advanced packaging equipment.
Despite the typical volatility in our end markets, we adhere to a simple business strategy. We will continue to develop new best in class advanced packaging systems to address the next wave of product applications, including the Internet of Things, wearable devices and other applications requiring under 20 nano geometries. Our TCB success this quarter and initial orders for wearable applications is a good example of our leading technological position in the assembly equipment market. Leveraging our technology strength and position with clients, we anticipate increasing our market share again in 2015. In addition, initiatives are in place to continue driving down cost and increase flexibility to generate optimal profits in various market environments.
Finally, we continue to evaluate acquisition candidates where we can expand our position in advanced packaging and or capitalize on opportunities to better utilize our business platform. Now a couple of words about our guidance for the Q2 of this year and the first half. Based on current backlog and feedback from customers, we expect sequential revenue growth of 10% to 15 percent in the Q2 this year, reflecting positive business momentum. Gross margins are anticipated to be between 46% 48% as compared to the 48.2% realized in Q1 ex restructuring benefit. Operating expenses are expected to grow an additional 5% to 7% ex restructuring benefit as we continue to be adversely affected by the strong Swiss franc in the near term and invest more R and D in TCB and in other wafer level development programs.
As a result, Q2 2015 net income should increase strongly over Q1 and our first half revenue and profit should increase versus the first half of last year. Visibility is limited at present as to second half order trends given the uncertainty direction of the global economy and the semiconductor industry. In summary, we had another solid first quarter with good top and bottom line growth and a strong order book to generate a favorable outlook for the Q2 and therefore the first half of this year. Revenue growth, operating leverage and strategic plan execution have resulted in an expansion of gross margins and net margins. Foreign exchange trends have been generally favorable to our revenue and gross margins, but have hurt operating expense development.
In response, we've taken swift action to adjust the Swiss based cost structure and supply chain. Given going forward, we are developing more leading edge new products and have operating initiatives in place to further drive upward revenue and profit growth. That ends our prepared remarks. I would like to open the call for some questions. Operator?
The first question is from Mr. Peter Olofsen from Kepler. Go ahead, sir.
Good morning, gentlemen. A couple of questions. First on the gross margin guidance, you are expecting sales to be up quarter on quarter. The U. S.
Dollar has strengthened a little bit further. Yet your guidance implies the gross margin will be down quarter on quarter. Can you explain what are the drivers for that? And then two questions on orders. First, you mentioned orders related to wearables.
Could you maybe tell us a bit more what kind of products will benefit most from new wearables being introduced in the market? And then on the statement that you have limited visibility on order trends in the second half, if you compare the situation with 12 months ago, is the visibility less than what had last year at this point of the year?
Okay. First question, sales up, however, gross margin down. As we explained, the gross margin of 48 point 2% excluding the benefit from the Swiss restructuring is a significant gross margin we have not reached so far. The guidance 46% to 48% is not far different from that level. It's always an order mix.
It has to do with cost, currencies, exchange rates. We see a dollar today at €1.12 That is significantly lower than the dollar we've seen at €1.06, €0.05, €0.07 who knows. So basically, strong order mix, a strong backlog and looking at a growth quarter. Wearables, we have all kinds of watches, also other wearables, which more have to do with healthcare. But clearly another chapter in end products, which require ultra thin, ultra fine interconnect technologies and that is where we have across the board a strong market position.
The limited order visibility, as we mentioned in the prepared remarks, the forecast of VLSI for this year's growth for assembly equipment is around 3% to 3.5% as opposed to the 24% reached last year. We have started off on a significantly higher growth rate. If you look year on year over 35% compared to Q4. So we have not seen that negative trend. However, we are all in the same world.
So that has led us to make a careful comment that apparently the visibility in the second half of the year is less than the visibility was last year for the second half of last year. So that is the explanation. Okay. Thank you.
The next question is from Mr. Hans Slop from Rabil Bank. Go ahead, sir.
Yes. Good morning, gentlemen. First question is on the OpEx level. You're guiding for an OpEx level of around €30,000,000 for the next quarter. Should we also take that as a run rate further in the year?
Or should the OpEx go down because of the relocation of the activities to Switzerland? That's my first question. And second question is you're mentioning slower growth in the high end smart phone segment. How long do you expect this to last?
Well, the first question, in the course of this year and especially in the second half of this year, we should see the cost base significantly decrease in Europe and a slight increase in the cost in Singapore. There's a factor 3 in cost between an average employee in Switzerland and in Singapore. So that €30,000,000 is basically a peak level and that will go down in the Q3, but even more in the Q4, more closely towards and depending, of course on the development programs towards the mid-20s. Then on your second slower growth, it is all about models. We had the iPhone 3, 4, 4S5, 6, 7, 8.
And then we have seen the Samsung Galaxy 3, 4, 5, now 6. So it's all depending upon the next generation product and that is tied to certain technology shifts to smaller geometries, we all know that. The timing of that is difficult to forecast. But one can be sure that in the future we will have next generation products. And if Besi is similarly positioned as it is today, we should have another next great route.
So we call that a seasonal effect. So far we have seen annual models, but that's across the board. Whether that continues, it will be interesting to see in August, July, August, what will be the program for September, October introduction of new products.
Okay. Thank you. And also in previous special leases, you mentioned the growth, let's say, in a more volume segment smartphone area with Xaimi. How is that developing this year?
Well, if you analyze our numbers, you can see a significant growth in revenue from Q4 to Q1 and also a significant growth from Q1 last year to Q1 this year. Remember revenue was €70,000,000 in Q1, 2014, €95,000,000 in Q1 this year. That is a very strong year over year growth and that comes from a very broad customer base in these end products, whether that is in communication devices, smartphones or other products or whether that's in automotive. So basically a much more broad and solid marketing position market position year over year, which is an excellent platform for the next generation.
Okay. Thank you.
There's a question coming from Mr. Philipp Scholte from Kempen. Go ahead, sir.
Yes. Good morning, everybody. I was wondering whether you could say anything more about your TCB progress. Is there anything to mention in maybe new customer gains? It seems like you were mentioning now strength in memory, which sounds a bit like a new area for you or am I completely wrong in that?
And the second question is on R and D costs. I now finally see a significant increase in R and D expenses. I guess that has to do with the Swiss franc as well, but are you indeed also stepping up R and D investments? And how can we model that going forward? And the 3rd, a bit of a detailed question is your financial line.
It has a €1,000,000 charge. Can you explain that please?
Of course. Well, your first on TCP. We have focused on memory PCB applications since 3 years because of the simple logic logic, the simple fact that that in volume will always be the largest market. And from requirements difficult and especially from cost. And we have succeeded in the past 3 years to develop a system which is today the chosen one in the industry.
And we have been fortunate to receive an additional 14 lines in Q1, which is if you know the average cost of or the average the cost of such a system, which is close to 1,000,000 that is becoming a decent business. So it's not new. So maybe you were not informed right, but that is very important to understand. We're also not only at one customer, but at several customers. Everyone who is going into TCB is in very close development with us and also ordering systems.
If you look at your second question, R and D costs, yes, it's going up for several reasons. We are investing strongly in TCB, but also in next generation, more tighter specs, smaller, thinner, more complex stack dies. And yes, the Swiss franc does have an impact. But basically going forward, if you look at our overall spending in R and D That is all customer related and business directly related. So if things go well, that should also point to higher revenues and further market share gains going forward.
Depending upon the revenue development, 10% of revenue, slightly below that, 9% is what is usual. In large up cycles, it drops down to 8%. But that we don't expect to change. There's also a significant portion in how we account for the R and D cost. So that also shows the success of the systems we developed in the previous years.
But the details are in the box. You can find capitalization, amortization specified in the box. So if you take the total R and D in Q1, which was €7,900,000 is about 8.3% of revenue. And then if you look at the you're referring to the so to say real R and D expenses, the €9,700,000 and they go up, partly that's Swiss franc and partially it's related to what Richard said, TCB applications, but those costs are 10.2% of revenue in Q1. Of course, they're influenced by amortization, capitalization and the one time gain that we've discussed relating to the restructuring in Switzerland and that is €2,000,000 So like what Richard said, the specification is in the box and the increase in the real cost is related to Swiss franc TCB and some other developments.
And also mentioned amortization goes up and that's an indicator of successful product introductions into the market. Then your question about the 1,000,000 cost. Yes. We have in our results usually some cost related to or positive can also be to ForEx. So basically there are some foreign currency effects in our P and L well every quarter.
Usually it's €200,000 to €300,000 because of course we have a very strict hedging policy, but there's no such thing as perfect hedge. So there are always some results. In the Q1 of this year, we had 2 special effects. One has to do with a significant order in 1 of the groups where we received already down payment and we hedged fully. So economically there was no risk.
But in the IFRS for specific reasons, we had to record foreign currency laws, but that will then be reversed in revenue. So it will change from one line to the other and it's also in a different time. The other event is of course the very rapid increase of the Swiss franc in Q1 and with such significant fluctuations also there the perfect hedge doesn't exist. So there's always a risk of some increase in foreign currency effects. But while looking at last year's, this is exceptionally and there are 2 exceptional situation as I just explained.
The next question is coming from Mr. Jong from S&F. Go ahead, sir.
Good morning, gentlemen. A few questions left for me. Also on TCB, you were talking about 14 lines in Q1. How should I see that? Is that revenues or shipments or what is that?
And then more on PCB memories you're getting is going to be a large client. You've seen Micron stepping up its efforts for 3 d NAND. I think that's probably also a large client of yours. How do you see developments in vertical NAND going into the second half of twenty fifteen? That's one part of the question.
The second is on the TSMC Intel CapEx cuts. How do they affect you? And maybe related to that, TSMC and Intel said they were going to reuse or remodel a lot of their tools. Is that a development that's also going on for you guys in at your higher technology machines? And the last question on revenues, if I want to get out take out the currency effects, what is the organic development exactly?
Those were the questions.
Okay. Let's start. Thanks, Edwin. The first question, there are orders, yes, and this will be shipped in Q2. There is also a significant further program.
If this really becomes mainstream, then this can be a very significant portion of the business.
So it will be, let's say, Q1's revenues, it will be already 15%. And the 14 lines that you mentioned in your order.
Yes. Correct.
So it would be a huge development. I mean, you were in Q4, you were not even on 5%, I think? Sales. Yes.
But again these things the timing of these technologies becoming mainstream is difficult, but it looks very promising. Let me put it that way. Your question about CapEx of Intel and TSMC reusing, I did not fully understand. Comment a bit on that?
What you have seen at TMC and Intel is that they use the tools that they order, for example, from ASML or for ASMI, especially in the front end business, of course. They upgraded them so they can use them at higher technology nodes.
Okay. Then I understand your question. That is for us luckily very difficult. So they need new equipment for every new round. And the reason is because the dimensions are different, often the materials used are different.
It also means that the specs of these machines are significantly different. So to have kids to modify and prepare for the next generation, so far we have not seen that. The changes are too significant to upgrade existing machines. Then the revenue, if you want to take out the currency effect, that's a difficult question because you also then have to assume that the business would have been the same at exchange rates in prior periods. A clear argument you hear by other companies reporting is that the higher dollar slows down the investments.
With us, you haven't seen that. You have seen the country. Our investments have increased with the higher dollar. If you simply make that blunt calculation, the currency effect on the order intake is around 2%. So without the higher dollar, we would have had then 2% lower order intake.
Okay. And that's something that I could use for the revenues in Q1 as well as sort of
Yes. But then the question is with again a weaker dollar, whether you can translate that immediately in higher or lower bookings, if you understand what I mean. That's a difficult question.
All right.
On the cost side, you could even argue the other way because we have a significant portion of materials we purchase in Asia. There's a direct link to the U. S. Dollar, so that cost has gone up. And we have less and less euro content.
So the increase in the gross margin to above 48% is then even more strong.
All right, clear.
Okay. Any further questions?
Yes, sir. There's a question coming from Mr. Peter Olofsen from Kepler. Go ahead, Mr. Mr.
Olofsen, excuse me. Mr. Olofsen?
I have a follow-up on the plating business and in particular on the solar opportunity. I think this could be a big opportunity for you. Do you think this may already show in sales in 2015? Or is this more something for the medium term?
No, no, that's already 2015, already also in 2014. We have a more and more successful technology introduced for mainstream solar cells using more copper as opposed to silver to make it very simple. We've been qualified by the largest solar panel suppliers. They have acquired systems. And if that continues that could develop into a very solid business.
For 2015, I think as a percentage of revenue, you're already talking about 5% overall Besi revenue.
Okay. And is that then based on these customers using this already in high volume production or are they still in a very early stage of the adoption?
2 customers are using that in high volume already.
Okay. That's clear. Thank you very much.
The next question is coming from Mr. Johannes Reissen, EBS Capital. Go ahead, sir.
Yes, hello. Maybe only some short follow-up. First, on the exchange rate, you have based your quarterly forecast. Is it the actual exchange rate of U. S.
Dollar of 1 $10 or what is the basic? And secondly, did I get it right that so far you don't see a weakness in the ordering regarding the second half and your cautious comments are only based on the general market uncertainty on semiconductor and economy, but you so far yourself, you can't see it. And finally, on TCP, like I said, it's hard when it gets mainstream, but if it gets mainstream given maybe the economics of this business, much more expensive machines, much slower throughput that could maybe if you stay successful there, maybe bring Paisley to a new dimension because the market is much larger?
Yes. Well, thank you, Johannes for your questions. The exchange that we use is end of quarter.
Okay.
And then the second question about, yes, it's more a general view following VLSI's forecast for 2015. Otherwise, we would not have guided higher revenue in Q2. And if you add Q1 and Q2, the first half year of 'fifteen should be significantly higher than 'fourteen. But this industry is volatile. It's also hard to forecast.
So the reason why we give such a comment is that we don't think we are smarter than VLSI. So anyway, we are still in an excellent shape. We're doing very well. But that's more passing on a general comment. Then on TCB, yes, if that becomes mainstream, but also you formalize it very correctly, It is significantly higher cost than a flip chip interconnect solution.
It has the advantage that you can stack more memory and have a shorter connection and that means less power, which is highly critical for next generation technology. And yeah, as it is developing so far, maybe you can also explain it's well above our own expectation. We expected development to be slower. But that's very positive, especially with such large orders. That means that our systems are doing very well.
Okay. Thanks a lot.
Chairperson, there are no further questions
don't hesitate to contact Cor or myself directly. Goodbye.
Ladies and gentlemen, this concludes the Besi event call. You may now disconnect your line. Thank you.