BE Semiconductor Industries NV
AEX:BESI
Earnings Call Analysis
Q3-2023 Analysis
BE Semiconductor Industries NV
The company reported a decline in revenue to EUR 123.3 million, a 24.1% falloff compared to the previous quarter, with net income similarly dropping to EUR 35 million, which is down by 33.5%. Over the nine months ending September 30, there was a substantive 28.4% revenue reduction and a 39.1% net income decrease, owed to a downturn in demand across computing and automotive applications.
Despite revenue setbacks, the company has experienced a 13.1% surge in orders due to rising demand in AI, high-performance computing, and photonic applications. This, paired with an impressive 64.6% gross margin and trimmed operating expenses, has helped sustain heightened profit levels.
The organization is on track to conclude a EUR 300 million share repurchase program and commence another worth EUR 60 million. These undertakings contribute to a significant 17.4% year-over-year increase in shareholder capital allocation, further bolstered by healthy cash reserves and deposits amounting to EUR 391.2 million.
Executive sentiments suggest a budding upturn in the assembly equipment market, with third-quarter improvements solidifying this outlook. TechInsights forecasts a noteworthy rebound for the company, particularly stronger than the front end or the test markets by 2024. The fourth-quarter revenue is projected to rise by 15% to 25%, bolstered by scheduled deliveries from backlogged orders.
The company's first sizeable order for memory applications using hybrid bonding technology represents a commitment to innovation and new market penetration. With ongoing development expected to culminate by the end of Q4, it's anticipated to yield significant future volumes across high-end smartphones and other portable devices. Moreover, the company's expansion in Singapore for hybrid bonding R&D echoes its potent role in driving technological evolution.
Over 40 customers are engaged in testing various uses of the company's interconnect technology, hinting at an expanding application base and strengthening industry presence. This extensive testing is taking place in the newly inaugurated development center in Singapore, which is also a signal of the company's commitment to pushing the frontiers of hybrid bonding technology.
The strategic increase in manufacturing volume is underway in Taiwan, projecting significant growth through 2025 and 2026. While Korean memory manufacturers lag, U.S. counterparts have adopted the company's technology, with Korean adoption potentially unfolding next year.
Two of the largest subcontractors, one in Taiwan and another in Korea, have been cooperating with the company, particularly in hybrid bonding and 2.5D CoWoS technology. This is indicative of not only regional growth but also the company's integral role in their future volume production strategies.
There’s optimism for a sizable future increase in orders as preparations are made for mainstream adoption, expected around 2025-2026. Projections show potentially higher volume shipments next year, further confirming the hybrid bonding technology's wide-reaching acceptance among top foundries and memory customers.
The notable growth of CoWoS presents a threefold expansion in capacity from this year, while the incremental photonics business contributes to broadened adoption at key customers. This combination of advancements is set to support the company’s engagement with a prominent U.S. customer, amid a broader customer base of over five in photonics, signaling a promising market presence expansion.
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Good morning, good afternoon, ladies and gentlemen, and welcome to Besi's Quarterly Conference Call and Audio Webcast to discuss the company's 2023 third 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] As a reminder, ladies and gentlemen, 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. Thank you.
Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release issued earlier today and then take your questions. I would like to remind you that some of the comments made in this call and some of the answers in response to your questions and management may contain forward-looking statements. Such statements may involve uncertainties and risks 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 third quarter and 9 months ended September 30, 2023, and also update you on the market, our strategy and outlook. First, some overall thoughts on the third quarter.
Besi reported solid third quarter results, with revenue and operating profit above the midpoint of prior guidance. For the quarter, revenue of EUR 123.3 million and a net income of EUR 35 million decreased by 24.1% and 33.5%, respectively, versus the second quarter of this year, but orders grew by 13.1%, reflecting increased demand for next-generation AI, high-performance computing, hybrid bonding and photonics applications.
The sequential revenue decrease was principally due to decreased shipments for high-end smartphone applications post the first half '23 seasonal capacity builds and general market weakness. Profit levels remained elevated, driven primarily by gross margins of 64.6% and a 15.6% decrease in operating expenses, both of which were better than prior guidance.
For the 9 months ended September 30 this year, revenue and net income declined by 28.4% and 39.1%, respectively, reflecting the impact of adverse market conditions on Besi's business this year. This year's revenue and order trends primarily reflect a broad-based downturn in demand for computing applications by both IDMs and Asian subcontractors and, to a lesser extent, reduced demand for automotive applications following strong growth over the past 2 years.
Our profit performance in this market environment remained strong, with gross margins up 3.7 points and a net margin realized of 29.1% as a result of the timely adjustment of Besi's operating model to current market realities. Besi continues to significantly outperform its results as compared to the last industry downturn with latest 12 months revenue and operating profit tracking 56.5% and 115.4% versus the comparable period of 2019, with operating margins up 9.5 points.
Our performance, this down cycle highlights our revenue and profit potential for the next upturn. To date, in 2023, capital allocation to shareholders has grown by 17.4% versus the comparable period last year. This brings Besi's capital allocation over the past 13 years to a total of EUR 1.8 billion. In addition, we will complete our EUR 300 million repurchase program on October 27, 2023, under which we will have purchased approximately 4.1 million shares at an average price of approximately EUR 70.
Effective November 1, we will initiate a new EUR 60 million program designed to further reduce share dilution from the conversion of our convertible notes outstanding.
Besi ended the quarter with a strong liquidity position, including cash and deposits of EUR 391.2 million, up 3.4% versus the second quarter of this year. Of note, our cash position reflects the capital allocation of EUR 412.4 million to shareholders this year.
Next, I'd like to speak a little bit about the current market environment and our strategy. We believe we are in the early phase of a new assembly market upturn based on independent research data and customer utilization rates post the trough reached in the second quarter of this year. As seen in this next chart, courtesy of TechInsights, it appears that the industry conditions improved further in the third quarter.
We caution, however, that there are many variables which could affect the upward slope of any new recovery, including global growth rates, geopolitical conflict and the development of each of our principal mobile computing and automotive end user markets. Analysts expect the assembly equipment market to fall more greatly in 2023 and to rebound more strongly in 2024 than either the front end or the test markets. TechInsights expects the assembly equipment market to rebound from trough levels in 2023 to reach next cycle peak levels in either '25 or '26 in the range of USD 6.5 billion to USD 7.1 billion.
At present, we are primarily focused on maintaining solid margins in the current downturn and executing development and operating initiatives to help capitalize on market opportunities in this next upturn. We are also pleased to report significant progress on our advanced packaging road map this quarter as we saw orders increase for generated AI, high-performance computing, photonics and CoWoS applications.
New hybrid bonding orders were received in the third quarter from 2 customers, including the first order from a leading subcontractor, as well as significant orders for photonics applications from industry-leading customers. Subsequent to end quarter, we received further hybrid bonding orders from a logic and a memory customer and anticipate additional orders in the fourth quarter of this year.
In addition, we received die bonding orders multiple Asian subcontractors for chip on wafer on substrate applications, both in the third and to date in the fourth quarter.
Now a few words about our fourth quarter and full year 2023 guidance. Given order trends in the third quarter and customer feedback, we remain cautiously optimistic, encouraged by the ongoing progress of our wafer-level assembly portfolio and market leadership position in key advanced packaging assembly systems. For the fourth quarter, we anticipate that revenue will increase by 15% to 25% versus the third quarter due to planned shipments from backlog of hybrid bonding and other advanced packaging systems. In addition, we expect gross margins to range between 62% and 64%, and for operating expenses to increase by approximately 5% versus the third quarter of this year. That ends our prepared remarks. I would like to open the call for questions. Operator?
[Operator Instructions] We will take the first question from the line of Charles Shi from Needham & Company.
So Richard, I think the first question really is about the Q4 uptick in the revenue outlook. And if we back out some really unique factors like hybrid bonding, how would the revenue trend from Q3 to Q4? And what's your read on where we are in terms of the cycle? I think you've provided some comments at the prepared remarks, but what exactly are the leading indicators looking at how bullish you are about 2024?
Well, Charles, thank you. First of all, if we back out the advanced packaging new technology, still the overall market is, I would say, flat. As we explained, utilization rates are up. We shared 3 months ago they were in the range of about 60% on average, I would say. They've climbed further to 70% to 80%. And the key question will be, is TechInsights right about -- there are few that the industry will recover strongly next year, or will, as we said, the slope of recovery be a bit more careful. It's always hard to tell.
End of October, if we draw this with a similarity in 2019, when we presented the third quarter at the same, I think, date or day before or after, we saw a similar situation and the market picked up before the end of Q4. So summarizing, I would say it typically follows a similar pattern, everyone being cautious after 6, 7 quarters of downward trend. We also saw numbers of competitors, peers in this sector in the recent week, indicating a similar picture.
So again, Besi is very strong in the new applications. We're enjoying, as explained, in the AI environment, photonics is also very strong, continued orders for hybrid binders for more customers, further proliferation adoption, however, you want to call it, in a broader sense. So that moves the needle at this moment. Does that answer your question, Charles?
Yes, Richard. So maybe a follow-up question on the orders. I think I've heard a couple of new things here. One is, you seem to say that you have got orders -- hybrid bonding orders for memory customers. Can you elaborate a little bit here because -- well, we kind of were expecting this order, right, for a while. And glad to hear it. It seems like it finally arrived. But the other thing, I think it's more interesting from my perspective is the orders for photonics application, can you kind of tell us what do you mean by photonics? Is it the optical communication kind of photonics or is it a mobile sensing kind of photonics, which was -- would be more of your traditional business? Any color on that would be great.
There are 2 types of photonics applications, which, today, are resulting in significant orders for us. One is related to the plugs, connecting the optical fiber to servers basically. And the other 1 is directly connecting it into an electronic circuit and that needs to be far more precise as we can imagine. It's, as I mentioned, a broader range of customers. We've been active, as you know, Charles, for many, many years in this photonics world, and still, let's say, lower volumes. But clearly, right now, there is a decent increase in demand in a broader sense. So for both the lesser critical, but also the more critical applications.
Sorry, I cut you off, but you had a comment on the memory or order for hybrid bonding.
Yes, the memory, as you nicely summarized, we've been expecting this for quite some time. We've been doing tests for multiple memory customer applications using hybrid bonding as an interconnect technology. The first -- after qualification and testing, the first real order has been received. So that also follows the road map we have indicated for the past nearly 3 years. So first, focus on logic, memory next, and also continued development in chiplet applications for high-end smartphone applications.
[Operator Instructions] We will take the next question from Marc Hesselink from ING.
Yes. The first question is actually following up on the last bit on the hybrid bonding for mobile applications. I think in the previous call, you said that it seemed that maybe it becomes a little bit earlier than versus your initial expectations at the Capital Markets Day. Can you update on that part?
Well, it has not changed from our comments 3 months ago. So continued development, tests, and you could say, according to plan. And if we translate that in -- or project this in mainstream applications, you are still talking about early as '25. And as we indicated on the Capital Markets Day, maybe '27, but who knows if it's 25 or '26. But the key is that the hybrid bonding process becomes ever more established and on the levels of 150, 200 nanometers with, by year-end, over 40 machines in the field, every day gaining significant progress, and progress means reliability and speed. We also shipped successfully the first 100-nanometer too as we have informed the market. Also a lot of further development on this next generation, we call it the Generation One Plus is continuing according to plan. And that should lead to ever more applications and for the high-end smartphones is typical and high-end computing is the chiplet capability.
So to combine multiple devices, same like in CoWoS, where you have a 2.5D type of design structure in using hybrid bonding to achieve a higher density, shorter distance, a direct interconnect, less power consumption. So all the benefits should add up and ultimately resulting in lower cost. So integrating electronic components, the big driver is not only performance, but is especially cost.
Okay, clear. Second question is a follow-up on the photonics. To understand even a bit better, is there something changed on the technology side of your client that -- because of that, they now need more equipment for you? Or is this -- is it more of a coincidence that now there was a step-up in demand for this business versus previous quarters?
No. It is more tied to the CoWoS environment, the CoWoS generation 2.5D and 1 of the technology steps is this photonics, which has been on the road map for, as I explained many years, and currently being accepted by the market and designed in at much higher volumes.
Okay. So this is something we can continue to be quite significant for the coming quarters and years?
That's what we, of course, hoped for. And if all goes well, that's certainly a possibility.
And then a final question on TCB. I believe if it's correct, last quarter, you had the first product for pilot production. Any feedback, any visibility on follow-up orders from that?
Yes. That's progressing very well. We are currently in the qualification phase as we indicated, which should be completed by quarter end Q4, that then should lead to orders in the first half, first quarter of next year to be delivered in the second half of next year. All according to previous plans.
We will take the next question from line of Rolf Bulk from New Street Research.
I wanted to ask a question on high-bandwidth memory as well. One of your Korean customers or 1 of the Korean memory manufacturers this morning mentioned that they expected HBM to grow at a 6% to 8% CAGR over the next 5 years. And I would love to get your insight into how those type of growth rates compare to the scenario that you laid out that your CMD in June where you guided for 800 to 1,900 hybrid bonding tools. So did you take into account those type of growth rates when you set those targets? And how should we think about potential upside from those levels?
Excellent. Well, we always interpret these comments as a confirmation of technology direction simply promising market growth. How much it will be, also depends. No customer has any definite knowledge about the next 5 years. But the key is that it is a mainstream significant growth driver. Those applications are certainly in our forecast. But as we always indicate, every year, we update or if there's a special event, of course, we update those models. But it's too early based on these indications to say, well, that means that the outlook for our systems is significantly higher.
Let's first understand these comments as a confirmation that we are on the right track.
Okay. Perfect. And as a follow-up, switching to logic, your other major customer last week mentioned that SoIC, which is their version of hybrid bonding, will be 1 of the faster-growing segments of the advanced packaging market next year. Do you see that optimism reflected in orders or at least in discussions that you are having with that customer?
This fits precisely in what we have indicated 3 months ago, but also at the Capital Markets Day that the trajectory for adoption and expansion is based on a model 2023 and '24, our initial volumes and mainstream markets initial devices, and we've seen that very positively, the AMD devices, for instance, manufactured in Taiwan. And then we indicated the U.S. to follow. And we have also mentioned today orders received in Q3, more orders to be received in Q4 and also till date in Q4 received, both for logic and for memory. So that all fits with the broader market information.
We'll take the next question from Madeleine Jenkins from UBS.
I was just wondering if you could maybe kind of quantify more what you're expecting for hybrid bonding orders this year and also next year. And also in the release, you flagged the first order for kind of leading subcontractor. Could you tell us what end market that relates to?
Well, #1 is logic devices, and there're many logic devices, also a combination of logic and memory. Subcontractor is very important. As a next step and to explain it in the most simple way, that means that higher volumes are expected in the future. Otherwise, tooling subcontractors is not, let's say, successful for the future. So that means that the customer who is driving this -- or customers, that we think it's 1 customer, but we don't know the name because that is not disclosed, is expecting significant volumes in the future.
So again, broader proliferation for different types and logics, also the first memories and then the combination logic and memory, and preparing also beyond that for applications in high-end smartphones, portable devices. That trajectory is certainly confirmed in the last 3 months.
Okay. And then I guess a quick follow-up on that. Are you seeing kind of any new applications emerge for hybrid bonding outside the sort of high bandwidth memory or kind of logic plus drawn used case? I've heard some of that maybe millimeter wave will be connected to hybrid bonding. So just wanted to see if you had anything on that.
No. What I can confirm is like we shared on the Capital Markets Day. Many customers are testing this technology for many applications in, you could say, initial pilot laboratory environment even for certain camera modules. So the interconnect technology, which allows smaller dimensions, which has the advantage of less heat cycle. So there're many other applications tested in the center of excellence, the prime materials center of excellence in Singapore.
As of this month, we also opened our own development center in Singapore next to Applied. Our focus is more on stand-alone hybrid bonding development in the center of excellence. We also have the integrated line, the cluster tool solution. And the reason for expansion is simply the constant, more applications being tested. So there're more drivers in a broader sense than only logic and memory and certain chiplet for high-end smartphones.
We will take the next question from Simon Coles from Barclays.
It's a follow-up on the hybrid bonding numbers. I think you said a minute ago that 40 units in the field by the end of the year. But if I look back on what you said in the past, I think at the end of last year, that was 35 in the field. So is that you've only shipped 5 units this year? Just trying to understand how that hybrid bonding shipments have been progressing in 2023, so that we know what we're working with as we go into 2024.
Well, as we said, it's over 40. It's not yet that 50, but the 30 number was not reached. Let's say, a year ago, we were, let's say, low 20s. So it's following the trajectory, which has been shared all along, not the precise numbers in the beginning. Taiwan indicated 50 donors, they haven't reached that yet. In a similar way, the U.S. indicated similar level. But what is more important is, of course, the applications and then having this technology in mainstream next-generation devices, and we see that increasing as we go along.
And as I said in the beginning, what is very positive is that we see an increase in volume in Taiwan gradually. We see an establishment of an initial mainstream volume application market in the U.S. And this all follows the '23, '24 plans, which should lead to significant volume increase in '25 and '26. And that road map still stands.
That's very helpful. And then, I mean, this has been a pretty severe downturn. China went into the downturn early and you always talked about 6, 8 quarters being a typical downturn and now you're past the bottom. Is that increasing utilization rates as you would have expected sort of for normal cycle upturn to begin? Or is it slower or faster than what you would have thought?
No. It's a typical pattern, and that's why we believe that the TechInsights, but also others. This industry has always in all these cycles and supposed the cycle #10 in the past 40 years. And it follows the same pattern. So you see utilization rates at subcontractors go up, and those are the first to expand capacity. And on an ongoing basis, you see new devices and new devices in low volumes for market qualification. And in a full cycle, you have, yes, major expansions in every direction. But this time, it's not different.
The only thing which we also tried to indicate in the press release, but also in the comments earlier, one never knows the or, how do you say that, the extent of an upturn. It all depends on economic situation. The geopolitical situation is not easy. For some high-end products, you see models connected to China as well. How will that continue? So every cycle in that sense is different.
We will take the next question from Didier from Bank of America.
I have to say I'm a bit lost I thought it's very difficult to understand the nuances and all the things you've said and written press release, et cetera. So I'm going to ask a few questions, and it would be great if you could help us. How many units for hybrid bonding do you think you will have shipped by the end of this year? Is this still the sort of high 20s you were talking about?
And then second, if you look at the orders you have at hand now for CoWoS, your backlog for hybrid bonding and expected orders for next year as well as the TCB orders that you expect in the first half, I mean, are you looking at significant growth in calendar year '24 or at least directionally, that business goes up and the core business may be rallied as well? Or I mean, just to help us understand a little bit because you're giving us too many hints and it's just difficult for me at least, a simple analyst, to understand all these things.
Well, thank you, Didier. What is, let's say positive in many ways is the continued adoption and also orders for these hybrid bonders. That means that the customers are ever more designing the interconnect using this hybrid bonding process into next-generation devices if this continues, this could lead next year, and we have indicated that also in the Capital Markets Day, to a significant further increase simply to prepare for real mainstream adoption in '25 and '26. Because you first those capacities established before you can run significant orders. So in the year '23, '24, it's all about preparation, initial volumes. The number is shipping the mid-20s, as you indicated, and maybe next year, it's more, who knows. But that is always with new technology.
No customer will give us a precise number of machines they will need in this phase. So that remains as it is, but the positive message to repeat that again is that, yes, we received multiple orders from multiple customers, and that is confirming that this technology is seeing a broader adoption. First, logic, now memory, and more to come. So that bodes well.
Yes. I just wanted to..
I can't give you detailed numbers in this phase.
Okay. So if I had to take a step back, so you've got 1 leading foundry that has got a huge installed base already and he's buying more. Is that right? #2, you've got 2 memory customers in Korea that have placed orders for HBM 4 and apparently, they are placing more orders, as you said, then you have now a Korean subcontractor -- sorry...
Let me correct you there.
Yes, sorry.
The Korean memory has not yet jumped on the bandwagon. The U.S. memory has jumped on the bandwagon.
Okay.
Korea is very close let's say the development could lead to adoption of hybrid bonding in next year and maybe also early next year. But that also has not changed from our previous speed of how this hybrid adoption will take place. Sorry to interrupt you.
No, no, that's fine. Yes, sorry, go ahead.
Your next statement where I interrupted you was, if you can help me?
No. So then on the subcontractors, it's just the choice of words is a bit unclear. So you announced today effectively 2 subcontractors as far as I understand, 2 OSATs, 1 in Korea and 1 somewhere else. And they are buying hybrid bonding systems to test the technology, anticipating major volume production in, let's say, '25 or something like that, or '26. Is that the right way to think about it?
Let me be a bit more clear. One subcontractor based in Taiwan for hybrid bonding. The subcontractor in Korea for 2.5D CoWoS related. So that's different.
Got it. Okay. But these 2 guys are OSATs. They are not foundries?
They are OSATs. They are the largest OSATs.
Perfect. Perfectly clear. That's great. And then CoWoS, I think when we talked -- I mean when you came to our conference in June, you said that there was a mid-single-digit million Euro contribution. So it was fairly de minimis. Now that CoWoS is growing very strongly and you clearly seem to benefit from it, would you venture in telling us how much CoWoS could be either in Q4 or next year?
Well, we mentioned that the projections publicly stated were threefold in the capacity compared to this year. And for that, you need more equipment, and that's now happening. And it's not only in Taiwan, but also in Korea and in China.
Perfect. And then my final question, I wanted to understand, is the photonics business incremental? I presume it's within the U.S. IDM, but is that incremental to the hybrid bonding business related to their chiplet architecture for servers?
Yes.
Okay. So you've got a broadening adoption at that customer. And then you've got TCB coming up next year as well. So you've got like a fairly large engagement with that major U.S. customer.
Yes. Yes. But it's more than 1 customer. It's 5 customers in photonics so far.
5 customers. Brilliant.
So we've been working on this for more than a decade. So it's not overnight. But that is linked to this 2.5D CoWoS.
It appears no further questions at this time. I'll hand it back over to your host, Mr. Richard Blickman, for closing comments.
Well, thank you all very much. And if you have any further questions, don't hesitate to contact us. All the best. Bye-bye.
Thank you for joining today's call. You may now disconnect.