X-FAB Silicon Foundries SE (XFAB) Earnings Call Transcript

Ladies and gentlemen, welcome to the X-FAB Third Quarter 2026 Results Conference Call. The speakers today will be Damien Macq, CEO; and Alba Morganti, CFO. [Operator Instructions] I will hand the conference over to Damien Macq, CEO. The floor is yours. Please go ahead.

Thank you, operator. Ladies and gentlemen, good morning, good afternoon. The third quarter provides further evidence of the recovery we started to see earlier by the end of the last quarter is gradually taking shape. Revenue amounted to $194.4 million. Excluding the impact of revenue recognized over time under IFRS-15 Revenue reached USD 200.7 million, up 2% sequentially and within our guidance of $195 million to $205 million. More importantly, bookings increased 30% quarter-over-quarter and 38% year-on-year to $224.7 million. The highest level -- this resulted in a book-to-bill ratio of 1.12 and brought our quarter end backlog to USD 313.6 million. Our core automotive, industrial and medical markets generated $187.8 million in revenue, representing 94% of our total revenue, excluding IFRS-15. Automotive revenue return returned to sequential growth, increasing 3% to $119.1 million. Even more encouragingly, automotive booking increased significantly as the inventory correction that affected auto no longer weighted on demand. This is an important indication that conditions in our largest end markets are progressively normalizing. Industrial revenue increased 10% sequentially to USD 49.6 million, supported in particular by the strong development of silicon carbide. Key customer reported as well gains on the robotic markets. Medical revenue amounted to USD 19.1 million in the third quarter. While this was 9% below the previous quarter, underlying demand remains strong in ultrasound and pacemaker applications, partly offset by lower demand from a major customer lab-on-a-chip device and for temperature sensors. Looking beyond the quarter, the medical pipeline remains promising. During Q3, we secured important design wins for a silicon photomultiplier used in medical scanning as well as for handled ultrasound application further strengthening our position in this attractive market. Together, the improving order situation in automotive, the sequential growth in industrial and the opportunity developing in medical reinforce our confidence in a gradual recovery. Capacity utilization across our manufacturing network is also increasing [indiscernible] prerequisite for converting higher demand into improved operational performance. At the same time, we are seeing encouraging evidence that the growth opportunity we have been developing beyond our traditional markets are starting to materialize. In our Smart CMOS & SOI business, strong demand for battery management system and AI data center test application supported production ramps during the quarter. We also secured an important design win for an activator used in optical circuit switches for data center. Our CMOS business -- sensor business is gaining momentum as well with customers looking for alternative supply sources. All these developments illustrate how its core competence in analog and mid-single semiconductor manufacturing are opening additional opportunities in medical and data center application. [indiscernible]. Revenue reached USD 16.2 million, increasing 68% year-on-year. Silicon carbide accounted for most of this business with its fab recording an all-time high number of silicon carbide wafers sold during the quarter, up 45% year-on-year. At the same time, our gallium nitride activity continued to gain momentum with a new number of gallium customers doubling from 6 to 12 over the past year. This development demonstrates the growing contribution of Wide-bandgap technologies to its diversification strategy. Microsystems & Photonics represents another important growth pillar. Microsystems & Photonics revenue amounted to USD 25.9 million in the quarter. Demand for MEMS sensor was particularly strong, especially from China. We also installed a pilot line for an industrial inkjet printing application based on [indiscernible] material further broadening the range of applications that can be industrialized in our manufacturing platform. In Photonics, we are seeing an important transition from technology development towards commercial engagement. Our heterogenous integration technology for integrating light source is generating strong customer interest and photonic prototyping revenue is growing. Paid engineering activity is increasing as well with photonic NRE expected to grow by approximately 40% year-over-year. Customer engagement are developing in areas such as light source integration and optical interconnect for data communication and AI infrastructure. This is an important development for X-FAB, the technology and capability we have built over the recent years are increasingly translating into concrete customer projects. We are supporting this opportunity with the right industrial platform. Construction of [indiscernible] has started, further expanding our capability in micro system and related technologies. At the same time, the transformation of our existing manufacturing footprint in [indiscernible] continues according to the plan. The end of line activity for Side B in [indiscernible] are executed in a controlled manner with completion currently targeted around the end of the first quarter 2027. This development are 2 sides of the transformation -- these developments are 2 sides of the same transformation. While we are progressively phasing out an older manufacturing footprint, we are simultaneous creating the foundation for the future of [indiscernible]. This transformation will further strengthen the sites focus on differentiated technologies and applications and reinforms its long-term role within IFA global manufacturing network. I will now pass the word to Alba, our CFO, to give you more update on the financials.

Thank you, Damien. Good evening, ladies and gentlemen. Let me now take you through our financial performance for the third quarter. In the third quarter, our revenue and EBITDA margin landed within our guidance and our profitability improved sequentially. The stronger bookings also support our expectation of a gradual recovery. However, we remain focused on our financial discipline. Our EBITDA reached $37.5 million, which shows an increase of 12% compared to the second quarter. Our EBITDA margin was 19.3% compared to 16.8% in the second quarter. If we exclude the IFRS-15 impact, the margin was still within our guidance of 17% to 20%. Operating profit was $4.3 million compared to the $2.1 million realized in Q2. Our financial focus remains on translating higher activity into stronger profitability, while maintaining cost controls over cost. Our CapEx totalized almost $32 million in the third quarter. We also received the first funding payment under the European Chip Act for our new microsystem fab [indiscernible]. If we deduct this funding, the net CapEx is a bit less than $30 million. Our priority remains to balance investment in future capabilities with disciplined capital allocation and liquidity management. At third -- at quarter end, cash and cash equivalent stood at $196 million, representing an increase of $32.5 million compared to the previous quarter. Cash generation, working capital management and investment discipline remains central financial priorities for us. And now let's have a look at our fourth quarter outlook. Looking ahead, we expect our fourth quarter revenue to come in between $205 million and $215 million, with an EBITDA margin of 19% to 22%. As in the previous quarter, this guidance excludes the impact of IFRS-15 revenue recognition over time and assumes an average exchange rate of USD 1.14 per euro. The guidance point to further sequential improvement supported by the stronger order intake and increasing capacity utilization. And to conclude, I would like to highlight that our third quarter performance confirms the business recovery. But nevertheless, our financial priorities remain to convert order momentum into profitable revenue, maintain investment discipline and strengthen our cash position. And now I will pass the word back to Damien.

Thank you, Alba. Overall, we are entering in the final quarter of 2026 with increasing confidence while remaining focused on execution. Our core markets are recovering, bookings are at the highest level in 2 years -- in the past 2 years, factory utilization is improving and new opportunities in medical, data center, Wide-bandgap technologies, Microsystems & Photonics are progressively moving from development towards business. Over the last several years, we deliberately invested in differentiated technologies, capabilities and capacity also through the long term. At the same time, we continue to adapt our manufacturing footprint to support its fabs further grow. Our priority is now clear, execute this transformation successfully, convert the recovery and our growing opportunity pipeline into production, increased utilization of our manufacturing assets and translate this into sustainable and profitable growth. The third quarter represents another important step in that direction. And with this, I wanted to thank you for listening and open the floor for questions. Thank you all.

[Operator Instructions] The first question is coming from Aleksander Peterc from Bernstein.

First of all, can you tell us a little bit more about the backlog that continues to increase nicely. You have a good book-to-bill. Is this feeding predominantly stronger growth into next year? Or is it going to be largely consumed already in the third -- in the final quarter of the year, where is this going? And I also know that you have a nice inflection in prototyping in most businesses, is this also an indication of activity into next year? And then I have a small follow-up.

All right. So regarding the backlog, yes, we got a solid backlog ahead. Typically, the backlog that is created is now lasting for 3 to 5 months typically, our cycle time remain under control, which means that most of our customers are ordering as late as they can. And so our visibility in the backlog for the full year 2027 is only going for us towards Q4 and partly in Q1. But all in all, if you look at the backlog combined with the forecast, we see a nice trend coming in our way at this point. So that is confirmed by the number that Alba just guided and how this evolves into Q1 is something that we will expose later on, but it's not a one shot. We see a trend. Regarding the prototyping, I'm not sure I got completely the question. So we see on the prototyping some evolution that is a bit flattish in the sense that if you compare our prototyping revenue over the past few quarters, you can observe a kind of stabilization around a lower level versus what we used to have in '23 and '22. Now remember, the prototyping numbers that we provided back during these years included also some of the some of the revenue related to ramp-up of products in preproduction. So the NRE revenue curve that you see that is reported in our data includes this overshoot for the year '23 -- '22 to '24, let's say. What we see, and that's not visible in the data that we provide, we are evaluating also the underneath evolution of our CMOS & SOI and we see some trends towards an increased number of tape-outs and also an increased number of value for tape-outs. So far, we do not publish that. We want to consolidate it and build a solid history. But as soon as we have a bit more information about that, we will also share it with you. I hope that answered your question, Alex.

Yes, yes. Just a quick follow-up on the wide-bandgap, could you tell us what is the breakdown between your data center customers and automotive customers in silicon carbide?

Compared to Q2, it's not changed drastically. So we still see 50 -- close to 50% in what we call industry and within industrial data center some volatility in automotive. So we have a customer in China generating a bit of volatility in our numbers. but we see very solid growth in the data center area. So that's -- moving forward, we anticipate to see continuous growth in data center. It's really quite impressive what some customers are achieving there. And from interaction with them, we see also a solid forecast coming in our way for 2027. Automotive, we will have to see how this business continue to evolve over the next quarter.

The next question is coming from Emmanuel Matot from ODDO BHF.

First, in automotive, do you now have enough visibility to call a sustainable recovery than just inventory normalization? Second, still in automotive, there any areas where fab has lost content or market shares during the previous negative cycle [indiscernible] that lasted 2 years. And do you see more competition from China for some specific key products [indiscernible]. And my last question, could you please let us know the total amount of LTA advanced payments that you still need to reform to your customers at the end of September?

Thank you, Emmanuel. So in automotive, the visibility right now is good. If we talk to our customers, they come with a positive view on how automotive is evolving. Remember, we mentioned this inventory correction. We believe it's behind us now. We believe we will now see the basic growth that we anticipate in automotive that is linked to electrification, that is linked to customization and also the upgrading of electric functions through the segment in automotive. So even with a constant number of cars being sold in the world. The number of chips sold [indiscernible] are expected to continue to increase and we believe this increase is what we will continue to see. The visibility in terms of numbers is low for the reason I mentioned earlier we have now customers ordering late. We have optimized cycle time. And so I think that's a good and healthy for the business overall. But unlike the times like 2, 3 years ago where the fab were very, very loaded and where our cycle time was extremely long. The visibility has reduced from that effect. But from indications that we have from customers, we get a positive view on the evolution for the technologies that we are deploying in automotive. If you look at the second question regarding the business that we might have lost, it's difficult to answer to that question. We see some customers telling us that they see renewed interest from the fact that we have capacity available. And so this year renewed interest from Tier 1s. This renewed interest [indiscernible] for the technologies of fab. I must also say that over the past 3 years, a tremendous effort has been made in improving our overall quality and operational efficiency in a general sense. And that is also helping our customers and their business. Regarding competition from China, we see some customers, some Chinese customers ordering at [indiscernible]. So I mentioned the BMS opportunity that is coming directly from China, for example, but also some of the MEMS and there, we see a strong demand. We know that competition will arrive and is preparing also some products on their side. But at this point in time, we have not lost opportunity or we cannot -- I cannot report any big opportunity that we might have lost from competitors in China. On the contrary, we see a fabless in China coming to its fab because they face a challenging situation. All the fab in China are reporting a fully loaded situation. They are very actively deploying chips for AI and around AI and so I think also fabless in China are securing their supply chain by continuing to interact with us. So right now, this competition from China is not touching us. That's about your second question. And for the third question on LTE, I will let Alba answer.

So at the end of Q3, our total balance, the residual amount due to customers under LTA prepayments was $173 million. So you can consider that by end up with another $20 million to be repaid within Q4.

And the [indiscernible] will be repaid next year.

No. It's roughly $20 million per quarter. So it will take another -- it will take us to -- up to 2028, but the vast majority will be already repaid in the next year.

We should be halfway end of the year. That's how you should look at [indiscernible].

Yes, that's the message. End of '26, we should be around 50% repayment done in total.

The next question is coming from Robert Sanders from Deutsche Bank.

I have a few questions. Yes, first question would just be around your bookings. Could you sort of estimate what bookings -- what percentage of your bookings are data center related? And I have a follow-up.

That's a good question. I would not be able to provide you the number. I think if you look at the booking right now, the majority of the data center booking is still on silicon carbide. But as I mentioned, we have also some some peripheral activities in the CMOS for pre-drivers and also, yes, for the the chips that are involved with the comparative monitoring and temperature management of data center. So based on motor drivers, either find drivers or cooling drivers for liquid cooling of data center. So we know about the application, but basically the same product or similar products are sold either in automotive or into data centers. So it's a bit difficult to get the exact value that would go directly into the data center.

Got it. And can you talk a bit about the situation in the industry in terms of capacity allocation challenges, some nodes being full, IDM shutting down 200-millimeter, TSMC and Samsung cutting wafers to too, western companies. How is that affecting you? And where are you seeing the demand by node?

It is somehow helping us. I was mentioning to some extent, we invested probably at a good time. So right now, there are not so many factories who are claiming to have capacity. And I think it's very, very challenging for foundries today to create capacity because we see the price and the lead time for equipment increasing also the effort that are made by mega factory in Texas that is very well known, seem to absorb a lot of the bandwidth of -- and a lot of the orders of tooling for equipment suppliers. So there is some challenge for factories right now to increase their capacity. So from that perspective, we have a good position and the consequence of that is that, yes, we see new customers coming in our way to look at our technology to support their supply -- to expand, in fact, their supply chain. So some customers who used to work exclusively with Taiwanese factories start to talk to us, and we are well engaged on some design wins with some of them. I cannot be specific about that. But all in all, it's really helping us. We see also some customers starting to request a new type of LTAs with us. So that's also somehow an indication that there are some challenge on the supply side. And I think from our knowledge of what's happening in Asia, I mentioned to our knowledge, most of the factories in China involved with -- also involved with mature nodes are fully loaded. They created for some capacity in 300 millimeter, but they are loaded. And the problem is aggravated, as you mentioned, by TSMC, they closed 2 factories already announced last year in [indiscernible] they transformed them into factories capable to support the packaging and assembly for data center. And likewise, Samsung also closed one factory. That's -- these are the things that we know about. And this is helping because some customers come to us for their new developments. But this is also helping our customers because they start to see that they are regaining some designs because some of their competitors are unable to supply or have challenged ahead to supply these customers. So all in all, I think we are in a good position from that perspective.

Sorry, just to be clear, the mega factory in [indiscernible], you're talking about [indiscernible]? I mean, surely, those would be buying [indiscernible] not mature tools because I have not...

They don't buy, of course, mature tool. They buy advanced tools. But from time to time, we need also -- we don't need advanced litho in our fabs. But when it comes about ordering to the same suppliers, talk about [indiscernible] and others. I mean all these guys, they see big orders coming in their way for the upcoming factory and the mega factory is one of them. And this is creating tension on the equipment supply. So the impact, what we see is that the -- we anticipate that the lead time for equipment will increase.

So given you're one of the few people to have spare capacity, how quickly could you fill your fab?

That's a good question. Overall, if you look at the fab filling, it depends if it is about customers who have existing product and they gain market share with their existing products. This goes extremely fast. So there, we can see demand raising. And we believe this demand raising is a combination of our customers gaining certain market share plus the fact that the intrinsic business in automotive, for example, keeps increasing. So there is this effect that plays also in our favor that comes quick. When we talk about customers that are developing new product with us or considering to use its fab for the next generation that takes much more time. So it's there is no simple answer to your question. On our side, what we are doing, you remember maybe in the previous call, we were mentioning that we were doing active management of our capacity to adjust the capacity to the demand. We are now in the process of reopening our dynamic capacity to be able to support this upcoming business.