Thank you for holding, and welcome everyone to the X-FAB quarterly conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star one. Thank you. I will now turn the call over to CEO, Rudi De Winter. Mr. De Winter, please go ahead.
Good evening, everyone. Welcome to the second quarter report. In the past quarter, X-FAB recorded total revenues of $227 million, up 20% year-on-year, and up 9% quarter-on-quarter. A portion of the revenue, $8.3 million, to be precise, is due to recognition of revenue over time, mainly related to long-term contracts with customers in accordance with IFRS 15. Excluding this event or this effect, quarterly revenues would have been $219 million and in line with the guided $205 million-$220 million. Alba will explain more about IFRS 15 later. X-FAB core markets, automotive, industrial, medical, accounted for $199 million, up 28% year-on-year, representing now a share of 91% of our revenues. Demand remains strong and continue to exceed X-FAB available production capacity.
Second quarter bookings came in at $221 million, with a book-to-bill of about 1.01. Backlog at the end of the second quarter amounted to $507 million, roughly as compared to previous quarter. In the second quarter, X-FAB automotive revenues set a record totaling $131 million. This represents a strong growth of 33% compared to the same quarter last year. The majority of this increase is mainly attributed to X-FAB France. The site significantly increased its wafer shipments in X-FAB popular 180 nm automotive process, and now produces 92% of its quarterly revenues based on X-FAB technologies, compared to 52% a year ago.
The positive momentum from converting X-FAB capacities to X-FAB Automotive technologies is expected to continue in the coming quarters, helping to close the gap between supply and demand from customers. The electrification of mobility is a key growth driver for X-FAB Automotive business, demand for X-FAB specialty technologies for high-voltage CMOS, as well as silicon carbide applications, remains high. Industrial revenues totaled $51 million in the second quarter, up 21% year-on-year. X-FAB comprehensive technology portfolio enables a wide range of industrial applications, addressing major global trends. Growth of X-FAB industrial business during the second quarter was primarily driven by strong demand for silicon carbide technology. The silicon carbide revenues in the second quarter were $17.3 million, up 36% year-on-year.
The even stronger increase in silicon carbide wafer shipments, up by 103% year-on-year, is not fully reflected in the top line due to a higher portion of customers that source their own silicon carbide raw wafers and consign them to X-FAB. This results in a lower total billing, but a better relative gross profit margin as the value added by X-FAB remains unaffected. We shipped about 11,000 wafers in the second quarter, and the onboarding of new projects and customers remains strong. In the second quarter, X-FAB Medical business recorded a revenue of $16 million, up 16% year-on-year, with a strong contribution of ultrasound probe applications. We expect that the medical will continue to perform well for the rest of the year.
In the second quarter, CCC revenues were $20 million, down 40% year-on-year. This reflects the planned decline in CCC legacy business, which until recently was produced at X-FAB France. While X-FAB France is in the process of converting the freed-up capacity to X-FAB's Automotive technology, the CCC revenues are now at a sustainable level. X-FAB top-line growth is no longer impacted by the decreasing legacy business. Prototyping revenues in the second quarter came in at $28 million, up 35% year-on-year and up 5%. This shows customers continue to design in new products in our technologies. It's a good indicator for continued future growth. Let me walk you through the operations update. The capacity utilization of X-FAB remains high throughout the second quarter. All teams have been focused on ensuring smooth operations and increasing productivity and wafer output further.
This gets supported by consistent clearing of production bottlenecks, automation projects, and execution of X-FAB capacity expansion programs, which continues to progress well and on schedule. In the second quarter, capital expenditure came in at $104 million, more than double against the previous quarter, in line with expectations. This is part of the three-year, $1 billion expansion program that is progressing well. The expenses this quarter were mainly related to capacity conversion at X-FAB France and the expansion of silicon carbide capacity in X-FAB Texas. The building extension at X-FAB, Sarawak, so in Malaysia, to provide additional clean room space, is also progressing well. Over the full year 2023, capital expenditures are expecting to come in at around $350 million. If we can pull in delivery schedules of equipment, it would be slightly more.
Let me pass you now the word to Alba for the finance update.
Thanks, Rudi. Good evening, ladies and gentlemen. Now let's talk about the financial update. Let me start this financial update by highlighting that in the second quarter, as Rudi already mentioned, we had again some all-time high record numbers, with an EBITDA of $62.3 million and an EBITDA margin of 27.4%, which was slightly above the guided range of 23%-27%. If we exclude the effects from the revenue recognition over time, the EBITDA margin would have been 27%, still in the high end of the guidance. Due to the long-term agreements with customers, which include a commitment from X-FAB to deliver and a commitment for the customer to buy certain wafer quantities, the IFRS 15 effect on over time revenue recognition has become material during the second quarter.
As a result, we have recognized over time revenue in the amount of $8.3 million in the second quarter. As a reminder, the objective of the IFRS 15 is to establish the principles that at an entity shall apply to report information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from certain type of contracts with a customer. The core principle of IFRS 15 is that an entity will recognize revenue related to the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In other words, considering our long-term agreements with customers, we considered all the contracts with 100% take-or-pay clause and have recognized the related portion of revenue over time.
Since the IFRS 15 are applicable, we have always made a quarterly simulation of all the contracts in scope. The result was not material until now. As mentioned above, with the additional LTAs that we have been signed, this amount now becomes material. Then we started to recognize revenues over time of $8.3 million in Q2. Now let's go back to the key numbers of our press release. We achieved an all-time high gross profit in the second quarter, amounting to $67.6 million, with an all-time high gross profit margin of almost 30%, which was mainly due to volume growth and improved product mix. Also good cost controlling. Probability, sorry, profitability was again unaffected by exchange rate fluctuations, thanks to the natural hedging of our business.
At a constant US dollar-euro exchange rate of 1.07, as experienced in the previous year's quarter, the EBITDA margin would have been 0.1 percentage points lower. Cash and cash equivalents at the end of the second quarter amounted to almost $442 million, up 26% compared to the end of the previous quarter. This increase is mainly due to the prepayment received from customers, with whom we have long-term agreements in place. This is also reflected in the cash flow from operating activities, which totals $203.5 million. The prepayment will be used to support capital expenditure in the next quarters. To conclude this financial section, I would like to share our guidance for next quarter.
We forecast our revenue to be in the range of $225 million-$240 million, with an EBITDA margin in the range of 24%-28%. The aforementioned guidance is based on an average exchange rate of $1.10 per EUR. Furthermore, we reiterate that our full year 2023 guidance is reconfirmed. Now I would like to give the word back to Rudi.
Thank you, Alba. I'm proud that X-FAB has delivered another strong quarter with a revenue record and a profitability record. We continue to see high demand, with automotive end markets being particularly strong. The long-term forecast show good loading for all the expansions we are doing. On the short term, a reliable supply to our customers remains key. We are fully focused on filling existing supply gaps and increasing our wafer production to match X-FAB's positive growth prospects and to serve our customers. Our capacity expansion program is well underway, with new equipments coming online at various sites and on a regular basis. Our unique technology portfolio supports solutions in high growth end markets, and I see X-FAB well on track to achieve its financial and strategic goals. With this, I would like to conclude, and I'm open for questions, operator.
Certainly. At this time, if you'd like to ask a question, please press star one on your telephone keypad. Again, that's star one on your telephone keypad. The first question comes from the line of Robert Sanders with Deutsche Bank. Your line is open.
Yeah. Hi, good evening. I'd love to get a bit more of a sense of how much visibility you have into the first half of next year, and whether and your loading by site. Thanks.
Well, the visibility in the first for next year is we have a large portion of our business covered by LTAs. With all the other customers, we work on forecasts, and altogether, this shows a very high loading, slightly above our capacities. We still, we think 2024 will continue to be a very, very busy year.
Got it. On silicon carbide, do you tend to be the single source for your customers? I noticed some of the companies that you supply to are exploring doing internal as well as outsourced silicon carbide production. I was just interested if you tend to be the single source or if there are or either companies that you supply to moving internal or moving to other foundries. Thanks.
We have around. Our customer base has further increased. We went from something like 28 to 31 customers. I'd say for, like, 90%, we're the sole source. There are a few who have also, either in-house or, maybe alternative sources.
Got it. Thanks a lot.
Again, if you'd like to ask a question, please press star 1 on your telephone keypad. Michael Roeg, with Degroof Petercam, your line is open.
Yes, good evening. First, I have a couple of, well, boring questions on accounting, and that relates to the sales recognized over time. Is your guidance for Q3 on the sales level and on the profit level, including an impact from sales over time? If so, is that again in the order of magnitude of EUR 8.3 million and EUR 3.2 million, respectively?
Yes, there is a portion of it that it is maybe in the range of $10 million.
$10 million. Are these sales recognized over time, is that really sales and profits, or is it real cash flows, or is this just an accounting twist?
This is-
adds something?
This is an accounting, so the real revenues are based on invoices, and that you get paid, and after 30 days, this is a portion of the inventory, that is. Well, the inventories are also recognized into the PNL. That something is done already since the history of the company.
Yeah.
What comes on top is that the profit that is made on those products, if they would be sold, also is recognized over time, and the revenue as well. In the end, if you look at if there is like $10 million recognized over time in the top line, there is roughly you could, as a model, you can assume that there is, on average, we make like 30% gross profit margin. That 30% of that is also falling through on the EBIT and the EBITDA and the gross profit and the profit line.
... Okay, and it's a bit strange now, 'cause now all of a sudden, I have two P&L accounts for the company. One, the IFRS, and the second one in which I remove that, well, $8.3 million in Q2, and profit impact as well.
Yeah, it unfortunately, this is something that we have not chosen for, but by our auditor.
Yeah. No, no. Luckily, you, you disclosed the impact in your press release, both on the sales and the EBITDA margin. Yeah, so now it's clear that included in your guidance, it's also this impact. That's good to know.
To keep it simple, because the impact is somewhat bigger, or you see a real impact when you start applying this. Normally, if in a year or so, the impacts are smaller because it's only the variations of it, and on average, there won't be such a big impact. Going forward, we will obviously continue to apply as to continue to use the IFRS 15 rule, but we will not report it any separately, like most companies do, so we will just talk about revenue as we used to.
Okay, there's a chance that in, in, say, 12 to 18 months, it could be zero impact. Can it even turn negative, like a reversal?
Well, in principle, yes. If we continue to do our business as usual, but without LTA contracts, then the auditor says, "Okay, there are no contracts anymore, so these revenue over time doesn't need to be recorded," and then, yeah, you have the opposite effect.
Okay.
In fact, the business is the same.
Yeah, I understand, but yeah, you see more how the real business is than we do with IFRS 15. I hope you continue to put a bullet in the press release with the impact, and then, we can do all the adjustments ourself. Now, for a question on the business itself. There was a substantial step-up in CapEx in the second quarter versus the first quarter, and there will be another step-up in the second half of the year. Was the increase just cash flow-wise in the payments, or did you also get a huge increase in deliveries in the second quarter, huh? Deliveries of equipment.
The $104 million, or was it, is the invoices that we paid on CapEx. This can contribute prepayments for deliveries, for new orders that we placed and deliveries that come later. That could also be intermediate payments for milestones of equipments to be delivered or final payments. Yes, there has been equipments delivered. That's clear. I cannot answer, I cannot break it down right now.
Okay. Probably the delivery will be smoother throughout the year than your cash flow statements on a quarterly basis show?
Oh, can you repeat what you said?
The delivery of equipment throughout the year will probably be relatively smooth, whereas your cash flow will probably show huge ups and downs.
Well, we expect that to come to a further acceleration, so we at least stay at least at the level where we are now for the next quarter and throughout the second half of this year. If so, we are will come in the full swing of the construction of the building in Malaysia, so we will have that, and we have move-in of equipment in France and Lubbock for the silicon carbides, which is continuing. That's the situation.
Okay. Then my final question on, on new equipment. Once you get a couple of new machines in a fab, you have to install them, test them, do production runs. How long does it generally take for a new piece of equipment to be 100% up and running? Is that half a year or a year?
Well, it depends, where they are used in the process, but you can, on average, take half a year. That's a good number.
Okay, clear. Good. That's it for now. Thank you.
Thank you.
That was our final question. I'd now like to turn the call back over to Mr. De Winter for closing remarks. Oh, we do have another question from Robert Sanders with Deutsche Bank. The line is open.
Just a bit of a housekeeping question. On what we see with these companies with massive CapEx is, you know, a big step up in depreciation. I was just wondering what is the kind of view on depreciation into next year and how that's gonna depress gross margin and net income? Thanks.
With respect to depreciation, what the way we treat this is, when the equipments are starting really volume production, then the depreciation starts. Maybe Alba, you can help me here over the next couple of years, that step by step, the depreciations go up to?
20, at least $20 million per quarter.
Well, this is where we are today.
No, then, sorry.
I think we're going to something like $200 million per year in 3 years from now, when the full $1 billion expansion is in place.
Got it. Thank you.
We do have a question from David O'Connor with BNP Paribas. Your line is open.
Yeah, great. Thanks for taking my question. Maybe just a couple on my side. just firstly, on the $8.3 million recognized from the LTAs, just to clarify, is there any shipments associated with that? Or at what point do those shipments occur, maybe for Alba?
Shipments. No, David, there are no shipments linked to that. It's only that we made an assessment of all the contracts where we have a 100% take-or-pay clause, we had to make an assessment on what is a reasonable portion that will be anyhow sold to those customers. That's why we now for Q2, we came to the number of $8.3 million.
Okay. Got it.
At this time.
This is a revenue that is recognized now, but when we ship the products and send the invoice, it is not. We already recognized the portion, so this is subtracted from the future revenue.
Got it. The costs are recognized now as well?
Yes.
Sure.
Yeah, the costs.
Got it.
recognized, they're just like it was also in the past. The costs were immediately recognized and went into inventory, so that doesn't change. The revenue is, or a portion of the revenue is recognized earlier.
Okay. Is there seasonality going forward on the quarter basis attached to that?
No.
-recognition?
No. It's related to the production, and then as well, the production for the foreseeable future, continues to go up, with no seasonality.
Got it. Got it. Thanks for that. Maybe, separately, another question just on the bookings flat quarter-on-quarter, any change on the bookings geographically or under the hood? Is there any mix change within those bookings, maybe from an end market perspective?
Not particularly, but for... It's mainly from the, from a market perspective. Automotive, industrial, medical, stays strong. The consumer type of CCC products, they are weaker. They're, let's say, somewhat, well, below the expectations. Anyhow, our production is at maximum. Doesn't really make a difference.
Understood. Maybe, just adding on to that, your comment about demand remaining above supply, is that just an automotive comment, and with industrial and medical now having normalized?
We are, yeah, maybe that's a fair statement. In the industrial, remember, there is also a lot of our silicon carbide is also in the industrial segment. There is also demand still higher than capacity.
Got it. Last one on my side. I think someone asked on utilization level. I didn't catch the answer. What was the utilization in Q2?
83%. Yeah.
This is maybe a little lower, but you need to take into account that we're transitioning in France from legacy technology, so we're kind of shutting some, some equipments down, ramping things up with different processes, qualifying them, and so forth. You need to take into account is somewhat a transition that's happening in France as well as in Lubbock for the silicon carbide.
Understood. Thanks so much. Very helpful.
I still have a question that came in live on the tax that we have a swing between Q1 and Q2 this year. This is mainly due to the fact that in Q1 we booked several deferred tax assets, while we remain stable in Q2. That's the reason.
There are no further questions by phone. Mr. De Winter, do you have any closing remarks?
Thank you. Thanks, everyone, for joining the call today, and I'm looking forward to speak to you again the 26th of October to, at the third quarter results. Thank you and have a nice evening.
This concludes today's call. We thank you for your participation. You may now disconnect.