BE Semiconductor Industries N.V. (BESI) Earnings Call Transcript

Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's Quarterly Conference Call and Audio Webcast to discuss the company's 2023 Second Quarter results. You can log into the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mr. Leon Verweijen, Senior Vice President, Finance. [Operator Instructions] This conference is being recorded and cannot be reproduced in whole or in part without written permission from the company. I would now like to turn the call over to Mr. Richard Blickman. Please go ahead, sir.

Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then take your questions. I would like to remind you 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 of our second quarter and 6 months ended June 30 and also update you on the market, our strategy and the outlook. First, some overall thoughts on the second quarter. Besi reported solid second quarter results with revenue and operating profit above the midpoint of prior guidance in a challenging industry environment. For the quarter, revenue of EUR 162.5 million and a net income of EUR 52.6 million increased by 21.8% and 52.5%, respectively, versus the first quarter of this year. Sequential revenue growth benefited from increased smartphone demand this year versus 2022, partially offset by weakness broadly in computing end user markets. Net margins also grew to 32.4% versus the 25.9% in the first quarter of this year, reflecting revenue growth, gross margin improvement to 65.6% and strict cost control efforts of production and operating overhead. Revenue and profit development in the first half year 2023 also reflected the impact of current adverse market conditions on Besi's business this year with revenue and orders each declining by 28.9% versus the first half year last year and net income decreasing by 39.2%. Current year revenue and order trends have been adversely affected by a broad-based downturn in computing applications, in particular, versus the first half of 2022, partially offset by a slight uptick in the amount for high-end smartphones versus last year's levels. Automotive order trends remained favorable in this first half year, although slightly below the strong contribution reported in the first half of last year. Of note, revenue from China increased by EUR 10.5 million or 11.4% versus the first half of 2022, reflecting modest improvement in demand for automotive, power and smartphone applications, although no meaningful uptrend has been established yet. We are pleased with our profit performance in the first half of this year despite industry challenges with peer-leading gross and net margins of approximately 65% and 30%, respectively. As seen in this chart, Besi's performance this cycle is also significantly ahead of the last downturn versus the comparable period of the prior cycle. In addition, we completed a 4-month strategic review of Besi's business in the second quarter of this year with a leading consulting firm to help advance our ambitions for expanding revenue and profit potential in this next up cycle. Besi is committed to enhancing shareholder value via long-term financial performance, sustainability efforts and capital allocation. To date, 2023, we have distributed EUR 367 million to shareholders, of which EUR 289 million was distributed in the second quarter of this year in the form of dividends and share repurchases. This brings total capital allocation to EUR 1.7 billion over the past 30 years, equal to approximately 30% of total revenue. In addition, we are on track to complete our EUR 300 million share repurchase program by October this year. We ended the quarter with a strong liquidity position, including cash and deposits of EUR 378.3 million post the large Q2 this year capital allocation. Decrease in our cash position at the end of the second quarter is consistent with historical trends following the payout of the annual dividend and increased share repurchase activity this year. Next, I'd like to speak a little bit about the current market environment and our strategy. It appears that the assembly equipment market formed the bottom for this down cycle in this past second quarter, posted a steep decline beginning last summer. In addition, customer utilization rates have increased recently, although it is too early to say whether such increase represents a seasonal or a structural trend and when a meaningful upturn may begin. If traditional assembly equipment cycles hold, one would expect an upturn either at the end of the third or in the fourth quarter of this year. Most analysts anticipate an industry upturn in the second half of 2023, with significant growth returning in '24 and '25 as per Techinsights based on the strong long-term secular drivers in Besi's customer and user markets. At present, we are primarily focused on profitability, navigating the current downturn and initiatives to capitalize on market opportunities in [ an acceptor ]. We've reduced the overhead and headcount in alignment with current market conditions and continue to increase our R&D investment for the next-generation systems. In addition, we've updated our strategic planning to help achieve business model growth objectives over the next 5 years. Progress also continues on our hybrid bonding and wafer-level assembly road map. Activity associated with hybrid bonding adoption has increased significantly over the past 6 months with the primary focus on customer qualification and testing of processes for next-generation architectures and new market applications. We believe that the prospects for wafer-level assembly growth have increased successfully each quarter. This belief is based on the high-level interest expressed by significant resources committed to and sampling work done by leading front-end customers, also [ OSATs ] and the development community, particularly in the areas of data center, AI, mobile and high-bandwidth memory applications. The favorable outlook also reflects Besi's first mover advantage, successful move to volume production, improved yields and ongoing progress in developing integrated hybrid bonding production lines, together with Applied Materials. We are also encouraged by the shipment of Besi's next-generation TCB system for qualification in high-volume production. Further, the Singapore cleanroom facility was completed recently to support process development for hybrid bonding adoption. From an operational perspective, Besi is targeting key expansion projects by year-end, including a Vietnam tooling support facility. In addition, we formed a new company in India, as a result of increasing mobile assembly demand in that country. And then there were also some organizational changes at the end of Q2 with the retirement of Ruurd Boomsma, CTO. Ruurd will continue his involvement with Besi as Chairman of a new Besi Technology Board to be organized in the second half of this year. His responsibilities have been resumed by the CTO office and members of senior management. I personally want to thank Ruurd on behalf of everyone for his important contributions to the growth over many years. Now a few words about the third quarter guidance. Near-term market outlook remains uncertain despite initial signs of improvement and varies per end user market. Accordingly, we anticipate that revenue will decline by between 20% and 30% versus the second quarter due to typical seasonal patterns and current industry conditions. In addition, we expect gross margins to range between 62% and 64%, Therefore, operating expenses to decline by 10% to 15% versus the second quarter. We also expect that the fourth quarter revenue will significantly exceed the third quarter revenue levels based on scheduled shipments from backlog, particularly for wafer-level systems. That ends my prepared remarks. I would like to open the call now for questions. Operator?

[Operator Instructions] We will take our first question from Ruben Devos from Kepler Chevreaux.

I have 2 questions. The first one relates to the production capacity for the hybrid bonders. I think in the past, you talked about 15 per month or about 180 on an annualized basis. I was just curious at what point could we sort of reasonably assume that this capacity would be filled? You've been quite specific historically in terms of how many hybrid bonding orders you realized. I think, at one point, it was about 7 to 8 per quarter sort of the run rate, but we missed a bit of that detail in this release. So also could you maybe talk about the phasing of orders heading into 2024 and, yes, and beyond? That's the first question.

Excellent. Well, as we have explained, the theoretical production capacity of 180 systems per annum has been put in place in the past 2 years, simply to convince customers that when adoption becomes mainstream, they can, let's say, expect delivery of systems to those levels from us, which should satisfy their demand in the next 3 years. We've also said that '23 and '24 are typical qualification years. So as we mentioned in this call, the qualification is continuing very rapidly. Those of you who have witnessed the SEMICON West event last week, where in a panel discussion with our key customers, AMD, Intel, Qualcomm, confirmation was provided that this ongoing qualification leads to adoption in the mainstream in the time frame as we have explained also in the Capital Markets Day, '23, '24, qualification, major volume, CPUs, '25, '26 memory kicking in. And what was interesting, we mentioned that following memory, high-end smartphones would kick in message last week that could also be earlier. So that tells you there is an enormous drive in the industry to design next-generation devices for interconnect using hybrid bonding processes. So that road map stands. Orders typically come in, in batches. There is no average in -- well, in the hindsight, you can calculate an average, but it depends on programs. So the question would be, where are we? We have received earlier this year orders for our next expansion in [ Taiwan ]. Those orders will be delivered this year. That's also why the comment the fourth quarter was made. And we expect certain orders for setting up initial production capacity here in the U.S. on top of already systems installed. And those should come in, in the next quarter, next 2 quarters. Production sites are being prepared. Don't forget that we're talking in hybrid bonding about front-end environment that takes longer than the technical assembly. The key message I'd like to share with everyone is that it's perfectly on track.

All right. Very helpful. And then just my second question. I think just around high-bandwidth memory. So I think we've seen quite a big update by the Koreans. They've also been quite aggressive to grow strongly here. You've talked a bit about the memory market road map in the CMD. But is there a fair possibility that these road maps could be accelerated, considering the very strong demand out there? And yes, and how should we think about the relative use of both TCB and hybrid bonding within memory or within high bandwidth memory?

Well, also, a very good question. As said, to your earlier question, the road maps, memory are also as they are, they have not been pulled forward or delayed. There's an enormous qualification, development activity with the major memory manufacturers using hybrid bonding technology. And so simply that road map stands. Your other question on TCB, that's another application area. The question, of course, is will that be a TCB or hybrid bonding. The advantage of hybrid bonding is also confirmed in many of the public documents, conferences over TCB. But they will be due, let's say, technologies for the coming years. Ultimately, hybrid bonding should be the major ones in the future horizon because TCB is limited for further shrink of interconnect design geometry. So that difficulty with TCB remains. But that's as much as we can say about this.

We will move on to our next participant, Charles Shi from Needham & Company.

Good afternoon, Richard. So if I look at your guidance for Q3, and you provided some preliminary color on Q4. Q3, the numbers will be slightly below seasonal, but I'm actually a little bit surprised to hear you are seeing significant higher revenue in Q4, which is definitely above seasonal, if I understand correctly, because your typical seasonality in Q4 should be down Q-on-Q. Can you provide a little bit of a breakdown to where -- why the pattern looks like this? Was there some delays in terms of backlog shipment from Q3 to Q4 that caused this pattern? And how confident you are in terms of shipping out the backlog in Q4? Because, well, just because it's in the backlog doesn't necessarily mean you will ship. So really just want to have a little bit more understanding about your confidence level at this point.

Excellent Charles. Well, it is like you, like you summarized, typically, second half is less than the first half. In Q3, with some exceptions, is also typically lower than Q2. And you can see the statistics also in our presentation. This time, it is a mix between the Engine 1 business, which is still impacted by the industry downturn, orders are on the lower levels with some positive maybe because we see utilization rate increase. I say that carefully because it doesn't tell you whether that's structural, yet that needs a bit more time. But why this increase? I'll say that again, it's because of shipments of systems in the backlog for the [ submicron ] technology. And they are tied to customers being able to accept and to install these systems in the cleanroom. And also the ASP times the number of machines helps to simply understand the higher revenue level. But as always, there are risks. But most of it is, of course, in the backlog. Certainly, the longer [ submicron ] systems are ready that's all scheduled or being prepared. So that's the picture, supported by backlog in place.

Yes. So is it fair to say the incremental revenue from Q3 to Q4, the primary driver is the wafer-level assembly systems here? That's the first part of the second. Okay. And then are you expecting some additional orders coming into Q3 to really support that incremental revenue from wafer level assembly? And sounds like the U.S. customer may be the top driver for that. Is that correct?

No, it is the other side of the Pacific and the orders to be expected, We still have a lead time of 9 months for these systems, especially with some additional features. So those will be delivered in the first half of next year. But these are orders placed in the first half of this year.

Richard, so okay, I just want to clarify, the U.S. customer, what's our current outlook right now in terms of wafer level assembly? When do you expect that orders for the initial volume production capacity? And when do you expect those will be shipped? That's my last question.

Well, if all goes well, you should see that in the coming months.

We will move on with our next participant, Madeleine Jenkins from UBS.

So my first is just on your new TCB tool. I was just wondering if you have seen any interest from other customers? And also whether it will be a candidate for kind of next-generation CoWoS?

So your first question is on the TCB tool. The answer is, yes. There's interest from 2 other major customers. So if all goes well, the machine, as you all know, has been shipped, is being qualified as we speak, in a trajectory of about 6 months. So we could expect October, November time frame, whether this is already to be used in the next generation? Or would that take a bit longer? That's always with certain uncertainty, but the pressure on the system performance is very high. So that's good news. The other 2 customers will use it for slightly different applications, but with the same process. One is related to memory. The other for another CPU type of device. So that looks very good. Your second question on CoWoS. Well, there's a lot happening, and there's a lot of, let's say, information shared publicly about CoWoS' expansion. We are certainly involved in that, not only with one customer, but also second customer in Korea. But still, we can't say that [ often enough ] volumes in that CoWoS are relatively limited in a sense that this is not a huge volume. But anyway, it's good business.

Okay. Great. And then I just had a very quick follow-up on hybrid bonding. I was just wondering, if your major competitors tool, the same as yours in terms of is it targeted in similar applications? Or are there any differences between the two?

Well, that's -- and that's again an excellent question. At this time, why use hybrid bonding? I said that a little bit in answer to the earlier question. The reason to do that is to have a more or, let's say, a higher yield interconnect solution compared to a TCB solution. That drives this solution. At the same time, when this is really feasible for mainstream, it allows you also to create the chiplet architectures, and some have already reached the market, take AMD. And there's a lot of, let's say, enthusiasm about this next step because that also has the potential to extend Moore's law, which is very important for the overall cost of semiconductor manufacturing apart from the performance of the devices. So since this hybrid bonding, July -- September '21, officially, the first devices were in the market, the industry started to really focus broadly on this. Before that time, it was, of course, known, but not that expected to be coming at that time frame. So also competitors after that first product successful in main applications started to focus on developing hybrid bonding applications. Like in any market, which has a growth potential, which is at the forefront of technology, that invites everyone and customers also like to have different choices. So far, we have been very fortunate that we were early adopters. In a sense 7, 8 years ago, we started with this whole development. We have mid-20 machines in full production, by year-end more. Others qualified. But in this chiplet architecture, you can imagine, not every device is the most complicated device. So you may end up with a selection of devices, some leading accuracies below 150 nanometers. We now delivered the first 100-nanometer machine, and 50 should be available in 2, 3 years from now. That's really for the most complicated devices. But then there are other devices, which need less accuracy in placement. And you may see market developments in that direction. But this is still early days. Our systems, we now have this 150 to 200 nanometers and 100-nanometer cover the entire spectrum and are running every day with higher yields, faster speeds. So that's the way to maintain certain head start in this technology. Does that answer your question?

We'll move on to Nigel van Putten from Morgan Stanley.

I have a follow-up on the hybrid bonding road map for smartphones, and thanks for posting the video of the AMAT symposium on the website. So if I summarize Qualcomm's comments correctly, I think they basically said we're thinking about it a lot, we want to do it, but cost limits adoption right now. So my question is 2 parts. I guess, first of all is, how large is the cost differential versus, I guess, flip-chip? And where do you think companies like Qualcomm would be happy with? And then second, have you formulated more of an explicit road map maybe together with AMAT to bring costs down? And if so, could you provide some color on what the upcoming signposts are in the time frame? That's my first question.

The best signpost is throughput. As you may remember, we indicated our machines today run with the devices, which are being produced at about 1,500 UPH. The machines, as such, are able to run twice that speed, 3,000 UPH. Any close competitor is at 1/3 of that, so at 500 UPH. Of course, their models, cost of ownership models, we should expect in the next year that we bring this throughput speed up. It all has to do with software, with also preparation. You have to recognize certain device structures and translate into accuracy placement. And that, in the end, will determine whether it's cost competitive using whatever flip-chip today, partly TCB, but flip-chip for simply the majority still and those machines run at 6,000, 7,000 UPH. But it's all about the design of the device. So it's the combination of design geometry cost and production cost. But your question, are we focused on that? Of course, and not because we -- but these customers really are demanding those solutions. So it will take some time. But every day, progress -- significant progress is made. That's why we also expand the capability of process development. Our Singapore lab is currently ready, and machines are being installed. And as of August, early September, we will be able to do side-by-side with AMAT on the other side of the road, tests on individual bonders and on integrated lines. And that all has to do with adoption in those categories and especially in the high end smartphones.

Got it. So if I summarize, I mean, you with AMAT, well, you're part of the equation is still increasing throughput. And I can imagine there's plenty of other developments needed as well, but there doesn't seem to be any structural hurdle. It's more improving the current process. And I won't try to pin you on what now the new time frame is for smartphone adoption, but that does seem to be -- or you flagged maybe 2027 at the Capital Markets Day. Let's just say that is more likely now, it seems. Is that sort of fair to say?

Well, I would say it differently. I was a bit or, let's say, positively encouraged by the fact that Qualcomm, but it's not only Qualcomm, that they are more actively '27 is too far out. It all depends whether we can realize that. So there's a very positive pressure on us to be able to achieve that.

Understood. And then maybe switching gears, a bit different question. In your prepared remarks, you said you formulated a new business objective for the next 5 years. I'd be very interested to hear what the revenue target is for that model. If you're able to share any color or a number, that would be helpful.

Well, first of all, we have to always reach the targets we have set so far. So our model, 1 billion plus, plus, plus, which equates to the EUR 1.3 billion model is the first hurdle and with a very, again, concentrated effort on what does it take to get there. With our Engine 1 business, the Engine 2, the submicron world, customers engaged our whole organization in a period of 16 weeks. And we need, of course, an upcycle for that anticipating that the upcycle comes. Yes, and in the past, we have always been able to reach those goals and even higher than that. So remember, the EUR 800 million model, the EUR 600 million model, the EUR 400 million model. So that's how it works.

No, that's exactly the reason for asking. I think the 2025 model is not a EUR 1 billion plus, plus, plus. So there seems to be more of a sort of cycle beyond that model. So I was just curious to hear if I could tease out a number, but I'll leave it there.

We'll move on to Marc Hesselink from ING.

Yes. Maybe first question on the strategic review that you're doing. Can you maybe share what's your intention? And what kind of things are you looking at increasing the revenue opportunity? Is it further increasing the efficiency, which is already at a very high level? Just your thoughts about doing this review.

Well, like we shared each time. There's an enormous development at this moment ongoing. If you simply imagine this wafer level universe, hybrid bonding, also chip to wafer in cleanroom environment, that requires from a company to shift from its assembly market environment forever into a front-end universe, different sites of customers, different process requirements. And you have to organize that very carefully because the risk you run, if you don't do that, right, you may lose both. So the fact that we organized these reviews with the entire management is to simply do as much as we can with our customers and partners to be able to get there. And don't forget, we had the initial phase, 150, 200-nanometer accuracy. Now gradually going to 100 nanometers, then down to 50. That is something and compare that to lithography, for instance, in the past decade. These are major inflection points. So the reason to do these exercises is to make sure as much as we can that we realize those objectives. The organizations change. There are new people on board. The organization structure has to be adjusted to business developments. Don't forget the support in the U.S., in Taiwan. A couple of years ago, we only heard of the name TSMC, and then Korea for that matter. So a lot has to be organized, apart from the change in the geopolitical or changes due to the geopolitical landscape. You mentioned Vietnam, [indiscernible] China and then India, not to forget. So there are many aspects, which provide enormous growth opportunities to maintain that growth and then with margins, which we have demonstrated, simply requires that you spend more in your strategy than the usual process in an annual sequence. So that's a longer answer to your question.

Okay. Clear. And then second question is actually on the gross margin, again, exceptionally high. And I know you just updated that guidance at the Capital Markets Day. But given that so many times, you're ahead of that guidance, is it continues to be upside risk to that number on a quarterly basis?

Gross margins, there are many factors, which influence, but number one is product position. So on an ongoing basis, our products are in a position where pricing allows these margins. But then there are other factors, like ongoing cost reductions. One of the major things you have to [indiscernible], we adjust very rapidly to lower demand or higher demand. So that is also unique. Then you have currencies were supported by a high dollar. The Asian currencies are under pressure. But all those factors, they -- and we manage this business, and some of you know, on a practically daily business, every Monday, Wednesday, Friday. And that all adds to controlling your cost, but also, at the same time, improving your market position. So that combination is what determines your margin. And yes, we can easily see that over the years, our product position has improved cycle by cycle. It's the result of a very, very clear focus and not making too many mistakes, although we make many mistakes.

But then the reason that you're still ahead of your own guidance, is that then -- what's driving that in like the very short period that you sometimes have even higher than the normal range?

Well, that can be any moment. I mean, don't forget, we have 18 or now with TCB 19 different platforms and different supply chain cost structures. As I said, there are sometimes pluses, and there are sometimes disappointments. So it's not that if we would have one product, it would be different. So that's the best answer.

And the final question that I have is, I was just wondering on which level do you have the strategic discussions? You clearly have it with your direct clients? Do you also have that on hybrid bonding and other submicron? Do you have that strategic discussions with the fabless companies?

Of course. Of course, it's all the customers in those advanced development of devices for, yes, the winner end products. And in the 3 categories, communication, so high-end smartphones, but also the other devices, wearables, et cetera. And then you have the whole computer space and you have automotive. So in all 3, there is this forefront technology development ongoing. And that you have to constantly analyze, are we focused on the right programs? And stop with those programs which are not mainstream and feasible. And there's no road map cast in stone. So you have to align those road maps constantly. And what's key at this time, when there's a major change in this whole interconnect technology, is to align with the right customers and the right partners. And one of them is Applied Materials. And the other is, of course, to understand what's happening in the lithography space. And so it's not just one customer.