Ladies and gentlemen, good afternoon and thank you for standing by. Welcome to Melexis Q1 2018 results call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time if you wish to ask a question, you will need to press star 1 on your telephone keypad and wait for your name to be announced. I must advise you that this conference is being recorded today, 20th of April 2018. I would now like to hand the conference over to your speaker today, Françoise Chombar. Please go ahead.
Thank you, operator. Dear audience, let us welcome you to our first earnings conference of the year. Your speakers are, as usual, Karen Van Griensven, our CFO, and myself, Françoise Chombar. After a market and financial highlight from our side, we will be happy to answer any questions you may have. Let's kick it off. Some highlights from the business and market side. Sales for Q1 2018 were EUR 139.3 million, an increase of 13% compared to the same quarter of the previous year and in line with expectations. The euro dollar exchange rate evolution had a negative impact of 7% compared to the same quarter of last year, and this is a very high percentage by comparison to the past. Excluding this negative currency impact, sales growth year-on-year would've been 20%.
The geographical spread is exactly the same in Q1 as it was for the full year 2017. The portion of standard product sales has meanwhile grown to 64% of total sales, in line with our long-term strategic intent. Looking at our Q1 growth drivers, we are satisfied that it is again broadly based. Let me give you five peaking examples. Our embedded lighting products are sprinting ahead. Ambient lighting is adopted into more and more cars, and Melexis is an outspoken market leader in this field. Two, pressure sensors are also doing extremely well. Last December, we launched the MLX90818, which is representative for what Melexis is mastering. Namely, making a significant step forward in automotive pressure measurement by offering the market highest accuracy and smallest size pressure sensor for harsh automotive applications.
This device will make a significant contribution to developing highly efficient and cleaner vehicles, thereby reducing pollution and preserving the environment. Thirdly, it was also a good quarter for our temperature sensors, both the smart integrated sensor type and also the sensor interface type for very high temperatures. Next, in the magnetic space, I'd like to highlight our latch and switch sensor product family. I believe it's fair to say that Melexis meanwhile has the largest and most innovative portfolio in the marketplace, which is why these products rise up in sales for many subsequent quarters now. In automotive, growth is driven by key customers that are moving the needle for several applications linked to safety systems and powertrain application. These customers find our products just optimum for automotive safety and energy consumption purposes. Applications include seat belt buckles, window lifts, and all types of motor commutation.
At the same time, consumer and industrial customers like our value optimized products and the breadth of our portfolio, which allows them to leverage this value into their product. Examples are usage in key locks, medical beds, and all types of industrial motors. Both automotive and adjacent markets equally appreciate the roadmap we present with continuous innovation ahead. Last but not least, our magnetic position sensors continue to grow as well. We launched in March a new generation of our Triaxis, again, reaffirming our number one position in this field. Main applications continue to be powertrain and in particular, the new electrified powertrain, both hybrid and pure electric vehicles. Furthermore, you'll find these products in steering, pedal, shifter applications, et cetera. The higher demands in robustness, safety, integration, electrification in general, and added features are driving many of the integration activities in this area.
We expect these to continue for the foreseeable future as autonomous driving, electric cars, and consumer demands for more comfort and ease of use continue to grow. Our sales outlook for the second quarter is around the same level as the first quarter. For the full year 2018, our guidance of 12%-15% sales growth is reconfirmed. The sales outlook reflects what we see in our order book. To conclude, this is a solid start of the year and we are geared up for further growth. Karen, you now have the stage.
Thank you, Françoise. Good afternoon, ladies and gentlemen. A little bit of explanation on the financials. The sales was already mentioned, 13% growth versus the quarter a year ago, with a high impact of the U.S. dollar of around 7%. If you look at the gross result, was EUR 63.1 million or 45.3% of sales. An increase of 11% compared to the same quarter of the last year, and an increase of 3% compared to the previous quarter. R&D expenses were around 13.3% of sales. G&A was at 4.9% of sales, and selling was at 2.4% of sales. The operating result was EUR 34.3 million, or 24.6% of sales, an increase of 9% compared to the same quarter of last year, and a decrease of 5% compared to the previous quarter.
The net result was EUR 28.8 million or EUR 0.71 per share, an increase of 13% compared to EUR 25.4 million or EUR 0.63 per share in the first quarter of 2017, and an increase of 8% compared to the previous quarter. I would now actually like to open the question and answer session. Operator, please go ahead.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, press star one to ask a question. You have several questions on the line. The first question comes from the line of François, sorry, Bouvignies. Please ask your question.
Hello. Thank you for taking my questions. The first one I had is on your seasonality, and your Q2 guidance. If we see that we have a quarter-on-quarter flat revenue growth in Q2 versus Q1, if we compare it to the historic, it was more around +6% at constant currency, in my math in the last five years. Is there any particular reason that would explain that, this difference versus your historic, seasonal, quarter-on-quarter growth in Q2 versus Q1?
Okay. Let me take that question for you. Growth as Melexis is experiencing, does not really go up in a straight line. When we look at our order coverage, we see indeed the second quarter to be in line with the first quarter. It still represents, if of course this materializes, let's be clear, this would still represent a year-on-year growth of around 8%. That excludes the negative currency effects which will still be significant. We saw similar patterns in earlier years, even the last example was last year, Q2 to Q3. Yeah. What causes this, main effects are probably short-term patterns in that short-term pattern we see are probably supply chain effect. You always have that, and it's hard to tell.
Is there any chance there was inventory build in Q1?
We can never be sure of that, of course. You should also make a clear view that the negative impact of the lower dollar will be much more in the first half of this year than in the second half of this year, because the spread is really big. I cannot even remember if we've had such a spread before in the exchange rate year-over-year.
Yeah. That's why, my question, because you had a significant negative impact to our constant currency. It's a very strong growth in Q1.
Yeah.
That's why I was wondering, maybe, it's possible that you had inventory build in the supply chain, and that's why your Q2 is a bit softer than your seasonal pattern, let's say.
Well, if you look at the general market, if you look at the inventories of the car manufacturers of the tier 1s of our inventory, the inventory of the distribution, there is not a big buildup as such. It's pretty much okay. Yeah, you have those effects. We cannot force our customers to order more. What we try to do in giving our guidance to the market is always to be as close to what we believe will be the reality at the end of the next quarter and the end of the year as we possibly can.
What we see is Q2 is a bit the same. Q3 and the rest of the year, we expect sequential growth to pick up again. It's still early in the year, the guidance range of 12%-15% remains intact, and it's our best estimate today. I don't know if I mentioned already, the customer sentiment continues to be positive.
Okay. That's very clear. Thank you. Just a quick one added on your own inventory, given that you see the inventory in the supply chain positive. In Q4, it was high compared to your historic again, and you mentioned that you had a strong growth pipeline, and that I totally understand, and we saw it in Q1. It's still high in Q2, and I was just wondering, should we expect this to go down or to continue at this kind of level going forward?
I think it's a pretty good level going forward.
Okay.
It also signals that we're set up for growth.
Yeah. Of course. We shouldn't expect a massive decline of your inventory days, then.
A massive decline?
We shouldn't expect a massive decline.
No, I don't think so. I think it's at a good level. There will always be some fluctuations.
Okay. That's clear. The other one added on your R&D investments in Q1. How should we think about the full year? If I remember correctly, last quarter you said that OpEx investment will be in line with growth. R&D, you have some new fabs under construction and to build. How should we think about the rest of the year about R&D as percentage of sales, maybe for the full year?
R&D, we are heavily investing in R&D. We see it already in Q1. It will continue throughout the year. Obviously, sales we also expect to grow. It might be that as a percentage of sales, also R&D will increase over the next quarters though.
Okay. That's clear. One last question from me, because I want to leave the floor to my peers. The other non-automotive growth, how should we think? You had a very strong year in 2017, and maybe it's very tough comps. It seems to me that you had a deceleration in this part of the business. Was just wondering, how should we think about this indeed going forward?
Well, Q1 is always a little bit less unless there are new products coming on board, which was not the case for Q1 this year. You always have the Chinese New Year, which is creating a little dip. As far as the long term is going forward, adjacent markets continue to be in our focus. I think, again, you have these supply chain effects and seasonality effects like Chinese New Year that influence. On the longer term, it is of course still our intention that it will lift off at some point in time. The automotive is growing so well that it's hard for the adjacent to keep up. They are more or less keeping up now with the same growth over the last maybe one and a half years to two years, more or less. Whereas previously, the adjacent market percentage was in decline.
We have more or less stabilized it now over the last two years. Yeah, it's still the intention that at some point in time it takes a better turn. Again, it's also because the automotive is doing so well.
Okay. That's great. Thank you very much. Have a nice weekend.
Thank you. You too.
Thank you for your question. The next question comes from the line of Guy Sips from KBC Securities. Please ask your question.
Yes. First of all, personal comment to Françoise. Congratulations with your recent prize for the Global Prize for Women Entrepreneurs. Secondly, I have two questions. One is related a little bit to the previous speaker. That is, you're very optimistic on the second half of this year. Is it already taking into account the expansions that you are doing in Sofia, in Bulgaria, and the one in France? Will we see the results of that later this year? The second is, this is the second quarter in a row where if we compare the quarter-on-quarter or the year-on-year increase of the non-automotive, that there the growth is lower than in the automotive area. Is there reasons for that or can we expect that also in non-automotive that can pick up and contribute to the growth going forward? Thank you.
Well, first of all, Guy, thank you very much for the congratulations. I consider this a real team success. It's not a personal success because three of the four criteria were related to Melexis. I'm very proud of being the CEO of a company that is successful, and of course, we will all work together to continue to make it successful. Thank you for your nice words. On your first question, when you say we are very optimistic for the second half, when in fact it's not about being optimistic or pessimistic. I think we assess what we see in our order book. We can only say that the order book is healthy and that the guidance reflects it.
The second point is that in the second year, the spreads between the USD in the second half of last year, and let's say the current one that we see. If the current one would go on, then it's not going to be such a large spread. Does the expansion plans that we have in Ypres contribute? Yes, Ypres will already contribute because the idea is that the building should be operational around summer, latest September, which means we will see some of that flowing in to the 2018 figures. Sofia, we just started, and the building will not be completed until end of next year, so there will not be a direct impact. Of course, we are continuing also to put more equipments in order to have larger capacity in Sofia.
This is a gradual, like we do in Ypres, like we do in Erfurt, like we do in Kuching. It's a gradual increase of the capacity as such. Gradually that will also contribute. But that's all factored in. As far as Corbeil is concerned, we are not going to start until, or we're going to ramp or kick it off, let's say Q2 operationally. The real ramp will not be for this year. The real ramp is then more or less end of the year, beginning of next year. Because it's a wafer probing site, it also means that it will not flow into our output until maybe Q1, Q2 next year. That's more or less when the capacity comes on board. On your second question, indeed, that goes back to what I said before.
I think it's clear that the adjacent markets are much more volatile than the automotive markets. As far as visibility is concerned, the automotive markets these days, or let's say the last couple of years, give us much less visibility than it was before. That has to do also with China, because China is still learning how to forecast. Our customers don't have planning in their vocabulary sometimes in China. That needs to professionalize, and we hope it will continue to improve. We do already see improvements there, but it's very hard. That's why it's also more difficult today than in the past to make good estimates. I think we didn't do too badly in the past, so we try to be realistic in any assessments that we make.
As far as the non-auto is concerned, the adjacent, like we prefer to call it, yes, I do expect it to pick up. The only problem is that it's even harder to predict. The intention is there. The products are coming slowly on board. We see good design wins in that space. Well, not design wins necessarily, but a good pipeline, I'd rather say. Yes, at some point in time it will pick up, but it more or less grows at the same pace as automotive, which is really already very good comparing to some of our peers. I hope that answers your questions.
Okay. Thank you. Chris, please also hold. Thank you.
Thank you.
Thank you for your question. Your next question comes from the line of Janardan Menon from Liberum. Please ask your question.
Hi, good evening, thanks for taking my questions. You said in your previous answer that perhaps the reason for the sort of lower than past seasonal trend into Q2 was supply chain effects. I was just wondering, could you just describe a little bit more what you mean by a supply chain effect? Then I have a couple of follow-ups.
Well, customers are always concerned for two things. One, their inventory should not be too high, and they keep that clear with very tight KPIs sometimes. Then, of course, when people in the procurement area or in the planning area have these KPIs, they look at it because they're penalized if they don't keep their inventories at the right levels, not too high. That's one thing that could influence. The second thing that is important for our customers is the security of supply. As is commonly known in the industry already last year as well, there is a tightness that leads to some customers getting at some point in time into maybe a panic, I don't know.
We cannot exclude, as I said it in previous calls as well, you can never exclude that customers would order a bit more than they usually would if there would be no tightness at all. The two things play together. We're not in the heads of our customers, and we're not in the systems of our customers, you can never really know what plays. There is always some fluctuation. There is also the fluctuation in demand that ripples through the supply chain. There is a time delay with that. It's the usual supply chain fluctuations that you would normally see. Maybe they are a bit more these days because of some uncertainties. We don't really have a big question mark about it, because again, we confirm the order book is healthy and the guidance reflects the order book.
We try to be as realistic as possible.
Just going with your previous experience of being in this industry for a long time, when you go through a situation where there is some degree of, say, double ordering, as you were alluding to, then you see that soften a little bit, perhaps even on a temporary basis, is that a sign of concern for how the overall market is trending? You would not regard that as a particularly major concern at this point in time?
No, I would not consider this as a concern. If we talk to our customers, then they see growth, they see new applications for them. We get very good design wins. We have gained market share in a number of places, and in general, the market in Europe, for example, is very good. The market in China is also good. If you look at the figures of car sales, it might be a little bit soft, but that has also something to do with the tax incentives that are being reduced. Overall, I was even in China myself last week, talked to quite a number of customers, and they all see growth coming. Even if it would be a bit soft because of maybe supply chain effects, it does not reflect the trend as such.
We don't see any indicator today that would lead us to say this is a trend. No, it is not a trend at all. Again, Q3, we see very good sequential growth coming.
Understood. Just on that last point, if to get to, say, your midpoint of around 13.5% growth, you would need to do 4% and 8% or 5% and 7% or something like that in the third and the fourth quarters, which would be higher than what you have historically done in the third and the fourth quarters, at least in the past few years. Does that suggest that, going the other way, that your customers are probably even more bullish about the second half than they have been in past years? How would you characterize their optimism about the market today versus what you saw, say, at a similar point last year?
I don't like the word optimistic because it suggests that it would be more than realistically possible. What I said was that the customer sentiment continues to be positive, and that's also what I feel when I talk to customers and what I feel when I get feedback from the teams, the sales teams, the product marketing teams that are in touch with customers. We make our best estimates always. We try to be as correct as possible. I think we have a name for that. Today, this is our best estimate. Flat or around the same level in Q2, and sequential growth to pick up again in the third quarter. That's what we see today.
There is no reason why this would be impossible, because we do see the right levels of interest and new products coming on board, new programs coming on board, organic growth in the existing programs. That's what we see when we talk to customers. That's why we assess that this is what it probably will be without having a crystal ball. Sometimes I would like a crystal ball.
Understood. Thank you very much. That's very clear.
Thank you for your question. Your next question is from Marcel Achterberg from Degroof Petercam. Please ask your question.
Thanks for taking my question. There's already been a lot of ground covered. Just one question. Given the material impact of the euro-dollar rate on the quarter and probably also on the coming quarter on revenue, is there also an impact, or has there been, or will there be in the current quarter on the gross and the EBIT margins that you could possibly quantify?
The guidance is for around 25% for the full year. Obviously, quarter to quarter is difficult to predict, but in general, we stick to that guidance. Sales will increase, operational expenses will increase as well. How much it will be in sync is very difficult to predict, but we don't expect major deviations in one way or the other.
There's not really a big time lag between the impact on revenue and the impact on the margin.
Yeah. In Q2, there might be a little bit more impact still if you have a flat sales growth.
Right.
We are hiring, we are also investing, so this might play somehow, but we need to say as well that we have a U.S. dollar effect in Q1, a negative U.S. dollar effect.
Which we will not have in Q2, so that might compensate.
On the inventory.
On the inventory.
On the inventory.
Yeah.
All right. Thank you very much.
Thank you for your question. The next and last question in the queue is from Jeff Osborne from Cowen and Company. Please ask your question.
Hey, good afternoon. Most of the questions have been answered, just a few quick ones from me. I was wondering if you could just touch on thematically, are you seeing more strength in the bookings and the revenue in ADAS applications or electrification? You typically highlight both, but I didn't know if there's a bias towards one or the other.
Yeah. What we do see today, definitely in combination also with what we see on the market, is electrification is really driving a lot. There is also some ADAS impact, or let's say influence rather. The ADAS programs are rather longer term, so on a longer horizon, whereas the electrification items or programs are much more short term. I would say electrification, at least as far as the portfolio of Melexis is concerned today, electrification impacts more than autonomous or assisted drive.
Got it. That's helpful. Two other quick ones. One, the five items that you led off with ambient lighting and finishing with magnetic position sensors-
were those in order of strength in the quarter? Meaning ambient lighting was what drove the revenue? I was just curious how you came up with the order that you wanted to discuss those.
Well, the order in which I wanted to discuss it had nothing to do with whether the first one was stronger than the last one or vice versa. It's just that the first one is a driver type of product and all the others are sensor products.
Got it. Then the last one.
It was a bit in Yeah. It's not at random, necessarily, but, of course, the magnetic space, you have the latch and switch. The last two were in the magnetic space.
Right.
Latch and switch, and then magnetics, sorry, position sensors. The first one was a driver, and the two middle ones were other types of sensors.
Right.
It was more at random than anything else.
Okay. That makes sense. The last one, just any thoughts on tax rate for the year? What we should be assuming there?
Well, we gave a guidance, 15%-20%, and that remains intact.
Got it. Thank you.
Thank you for your question. Ladies and gentlemen, as a reminder, please press star one if you wish to ask the next question. Thank you. We have not received any further questions. Please continue.
Thank you. Dear audience, it was a pleasure to have your interest and sharp questions. Thank you for having joined us. Looking forward to our next earnings conference call on August 1st. Goodbye, and enjoy this lovely spring. Thank you.
Ladies and gentlemen, this does conclude your conference for today. Thank you very much for participating. You may now all disconnect. Speakers, please stand by.