Korn Ferry

NYSE:KFY

Hello, and welcome to the Melexis Q1 2025 Results Conference Call. My name is George. I'll be coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions]

I'd now like to hand the call over to your host today, Mr. Marc Biron, CEO, to begin today's conference. Please go ahead, sir.

Hello, everyone, and welcome to our first quarter 2025 earnings call. Together with our CFO, Karen Van Griensven, I will discuss how the year has started for Melexis and how we are preparing for the future as an electrified and robotized world remains the growth driver for Melexis.

While taking into account the changes in external conditions and adjusting where needed, we always focus on things within our control. In Q1 '25, sales were within our guidance despite a volatile and fast-changing market environment. Sales to customers in Asia-Pacific were 64% of total sales, while from an end market perspective, beyond automotive sales were 12%.

The current gross profit margin is clearly below where we want to be, and the actions we are taking are expected to have an impact by the end of this year. You may have read that we did not include a comment in our expectation after the first half of this year. Since we reported full year results last February, customers in our end markets are facing a wider range of scenario due to tariff announcement.

Importantly, on average, customer and [indiscernible] inventories look stable at acceptable levels. The current uncertainties seems to delay the order pickup, and we are also seeing orders coming in very late. Those are the reasons why we did not provide an outlook for the second half of '25. I would add that there are no signs of customers pulling in order forward to anticipate potential changes to trading terms.

Turning back to our results. In the first quarter of this year, our inductive position sensor have performed very well, addressing needs in the powertrain of electrified vehicle and also in the advanced steering and braking system, which are crucial for assisted driving.

Similarly, our latest generation of electric motor drivers has excel for small motoring valves and for larger motoring pump, which are 2 key applications of the thermal management and in-cabin comfort system. Some of those fan drivers have also found success beyond automotive, such as in refrigerators to improve cooling efficiency.

As for our temperature sensors, our solution continue to be very successful in consumer health wearable application. Among the product launches, I would like to highlight our automotive dual LED drivers, enabling the most demanding light animation for interior and exterior lighting.

Lastly, I remain personally involved in our strategic activities targeting innovative application in robotics. It is an area where we aim to capture significant market share in the midterm and particularly in China. To reach our ambition, we are accelerating the development of several sensor and driver products, and we start to heavily promote them globally at customers and at fairs.

As a takeaway, I reconfirm that wherever electrification or robotization exists, there are growth opportunities for Melexis in the automotive and Beyond Automotive applications.

I also want to highlight more broadly our progress in China. In 2024, sales in Greater China were 28% of Melexis total coming from less than 20% just 5 years ago. This is due to bringing strong innovation, product quality and local technical support. We are pleased to take the next step in our strategy as announced in Electronica China in April. The objectives are to accelerate innovation, intensify customer collaboration and reduce lead time in this key market.

To do this, we have established partnerships to outsource semiconductor assembly and testing. We will also manufacture in China product developed by Melexis tailored to the Chinese market and scheduled to enter production in the first half of '26. We have moved to a new larger office in Shanghai in March to accommodate our growing commercial and technical support activities. Customer feedback has been very positive as we deliver on commitment made in our China for China strategy.

Last but not least, according to TechInsights more recent report released earlier this month, Melexis ranks #4 globally in automotive sensors with one of the highest sales CAGR over the past 5 years.

All in all, I'm pleased to see how our team are managing the present and preparing the future success of Melexis.

Now I will hand it over to our CFO, Karen Van Griensven, who will comment on our financial performance.

Thank you, Marc, and hello, everybody. So as already mentioned, the sales for the first quarter of 2025 were EUR 198.2 million, a decrease of 18% compared to the same quarter of the previous year and stable compared to the previous quarter. And the euro-U.S. dollar exchange rate evolution had a positive impact of 1% on sales compared to both the same quarter of last year and the previous quarter. The gross result was EUR 75.7 million or 38.2% of sales, a decrease of 29% compared to the same quarter of last year and a decrease of 2% compared to the previous quarter.

R&D expenses were 14.3% of sales. G&A was at 6.8% of sales and selling was at 2.4% of sales. The operating result was EUR 29 million or 14% of sales, a decrease of 55% compared to the same quarter of last year and an increase of 5% compared to the previous quarter. The net result was EUR 24.6 million or EUR 0.61 per share, a decrease of 54% compared to EUR 52.9 million or EUR 1.31 per share in the first quarter of 2024 and an increase of 35% compared to the previous quarter.

Now looking at the outlook. So despite a weaker euro/U.S. dollar exchange rate of 1.09, previously 1.03, Melexis confirms its outlook for sales to be around EUR 400 million for the first half of 2025. And for the same reason, Melexis now expects a gross profit margin around 39%, previously around 40% and an operating margin around 15%, previously around 16% for the first half of 2025.

Melexis continues to expect an upturn in sales later this year -- Sorry, Melexis expects CapEx to be around EUR 50 million.

I would like to now actually open the Q&A session. Operator, please go ahead.

[Operator Instructions] Our first question is coming from Janardan Menon of Jefferies.

Just a little bit -- just to dive a bit more deeper into the second half outlook, where you had talked about a significant increase in the second half versus the first half in your Q4 results. And clearly, you are not confirming that at this point in time. But what can you tell us about the second half? I mean, do we -- can we at least have some confidence or feeling based on your current order outlook booking level that you will see higher revenues in the second half versus the first half? Is that something that can be confirmed? Or is there some uncertainty on that as well?

And just on -- in the same thing, on your Q2 guidance of around EUR 202 million at the midpoint, can you confirm what exactly is the currency effect? I mean, if the currency had stayed at the lower level than -- rather than 1.09, then what would have been your revenue for this quarter?

Yes. On the first part of the question, yes, as you have understood and as you know, probably there are a lot of uncertainties in the market in general. We are also receiving the order very, very late. It's exceptional. As an example, last week we have still received order for Q2. Q2 will stop in 2 months. But last week, we are still receiving order.

It means it's really difficult to give an accurate view on what will happen in the second half of the year. You have also read that OEM are giving in the press, let's say, some message recently. What I can say is that we believe that the Q4 '24, the Q1 '25 is somewhere the bottom of the situation. But I think we need to be conscious that all scenarios are probably on the table. Does it answer your question?

Yes. Just a follow-up. Some of the other companies have talked about a rising book-to-bill. And in most cases, it's gone above 1. So would that be something that Melexis has also seen in terms of a rising book-to-bill? And is the uncertainty that you're talking about more because you're not sure whether the book-to-bill -- the order book is reliable or not?

We discussed during the last conference call about the different indicators that we are following and book-to-bill is one of them. I would say that since last time, it's relatively stable. I mean, it does not degrade, but it is stable.

Understood. And on the Q2 guidance, what would be the currency impact on the revenue?

It's around -- for 5% dollar impact, it's around 2% sales impact.

Our next question will be coming from Francois Bouvignies of UBS.

I just wanted to come back on Asia revenues. I noticed that Asian revenue was down 10% year-over-year. It was also down last quarter. So I was just wondering, I guess, China is a big part of this Asian revenue. So can you maybe tell us the trend that you see in China at this point? And of course, we noticed the strong acceleration of strategy in China. So maybe you can elaborate as to why you are accelerating this China strategy? Is it because you see that -- you see some market share loss somehow or some risk emerging with locals? That would be my first questions maybe.

The Asia and China have indeed decreased if you compare with last year, but they have decreased much less than in Europe or in the U.S. And I think it's more a positive sign that China performed, let's say -- China or Asia performed better than the rest of the world.

And indeed, we are accelerating our strategy in China, not because we are seeing risk or because we lose market share, but more because we see that there are a lot of business opportunities there, and we want to be well-positioned in China in order to grasp this business. And it's more for a positive reason than for a negative reason.

In Q1, there is always the China New Year. So that also explains to some extent the drop versus Q4. It will go up again in Q2.

Yes. As we mentioned during the Q1, the design win and the opportunity pipe is growing well in China. If we speak about Beyond Automotive and the robotic, we see also a lot of traction in China for those kind of applications. It's why we want indeed to strengthen our position there.

We'll now move to Sandeep Deshpande of JPMorgan.

My first question is regarding your currency assumption on the margin. I mean, if you assume -- I mean, clearly, you're not giving any guidance for the second half. But given where the currency is today, say, EUR 1.14 or so to the dollar, would it mean that if the revenue remained at the same level, say, EUR 400 million in the second half of the year, that your gross margin will decline further in the second half of the year given the currency has shifted?

And my second question is regarding your exposure in -- you talked about your growth outside automotive in robotics, et cetera. Can you talk about how your design win activity is going? So I mean today, you're approximately 88% automotive exposed. Is your design win activity in terms of signed up design more or lesser in automotive today than the reported revenue? So for instance, that your design win activity is, say, 85% versus 88% today for the next 2, 3 years?

I will first take the U.S. dollar question. Actually, the effect that we see today is -- of the euro-U.S. dollar is mainly -- are not structural. It has to do with revaluation of our inventory.

Structurally, the impact of the U.S. dollar on the margin is quite limited. It actually even has a slightly positive effect on the gross margin. On the EBIT margin, it's quite stable. So the effect we see today of the U.S. dollar is purely on inventory revaluation, it's not structural.

So 2% in Q1 in our gross margin is actually lost due to revaluation reasons. So not structurally, 2% is also linked to yields, and that is also not structural. The yield improvements will happen throughout the year. Most likely by year-end, the yields will be back to more historical levels. Does that explain your question?

You're implying in that, that actually, even if the revenue remains EUR 400 million, then your margin will improve in the second half of the year because it is not...

For 2 reasons. If the dollar remains quite stable, it will improve because there will not be a revaluation effect. And also the yield we expect to improve.

Understood. And my second question?

On the design win question in Beyond Automotive. Yes, first of all, the design win is really the end of the business creation process. When we start to create the opportunity, let's say, there is months, sometimes even 2 years to get the design win.

Design win is really at the end of the business creation. Then we don't see yet a tremendous effect on design win for the Beyond Automotive because it's too late in the process, but we see a very significant effect on the business creation and the opportunity increase. And we see that we have more and more opportunity coming from the Beyond Automotive market. And now the job of the business creation team is to convert all those opportunities in design win.

Our next question will be coming from Mr. Guy Sips of KBC Securities.

I want to come back to your next step in your China strategy. You're focused until now in the comments on the nonautomotive part, but can you also give us some indications what your view is on China automotive market and how do you want to position yourself going forward?

Indeed, when I say there are a lot of opportunities in China as it [indiscernible] in automotive and in Beyond Automotive, yes, the Chinese market is leading the EV application. It's also leading all the premiumization of the car in terms of comfort and safety. Then there are a lot of new business opportunity in China also in automotive. And in order to address those opportunities, yes, there are different mandatory action. I would say the first one is to bring the right innovation with the right supply chain.

It's coming back to the China for China strategy. It's why the Chinese customer expect that -- I would say, for the time being, part of the supply chain is done in China, but in the near future the full supply chain should be in China. It's why we have in automotive products that are today assembled in China and also test in China, and we will increase those number of products.

And for the wafer fab, we are in design process in the wafer fab in China in order to be able to deliver automotive products coming from a China process in the future. And I mentioned the objective is that the first product, which will be a current sensor, will go out of a China fab in '26.

And last but not least, the third mandatory aspect is the customer support, the technical support. We clearly see that the Chinese customer expect immediate reaction, immediate answer in case of question. They expect a kind of plug-and-play product that -- they don't want to lose time to understand how the product is working, how to include the product in the application. It must be, let's say, plug-and-play. If it's not plug and play, we should answer immediately their question. It's why we are strengthening the team in China in order to optimize, let's say, the customer support on this.

And just perhaps to finish on the supply chain in China. Yes, the 2 other reasons to have the supply chain in China is the lead time. We need to reduce our lead time in China and also the cost aspect, obviously.

We will now move to Ruben Devos of Kepler Cheuvreux.

I just had a follow-up on China still. So just thinking about maybe, let's say, last 12 months and also recently what has been happening around tariffs and sort of the hostility between China and the U.S.? Have you been seeing, let's say, a structural shifts in China towards more local content initially, but then also a preference for non-U.S. origin chips in the customer design-ins? That's the first question.

Yes, the short answer is, yes. We have seen some requests from Chinese customers coming to Melexis for this reason. We have set up, let's say, a work group in China in order to address those opportunities. And yes, we have seen some move in this direction.

Okay. And can you -- I believe you said 28% of sales was China, right? But -- and how does that percentage compare in terms of [ design-in ]?

We -- I cannot answer directly. I can say that for the first time in Q4 '24, we had more design win in China than in Europe.

It's higher than the 28% anyway that we have in sales.

Yes. Maybe.

Okay. Okay. And then just a second question around foundry -- the foundry mix. I think last year you already added a foundry next to X-Fab. I think it was a Korean foundry, if I'm not mistaken. Now you're also looking into China. Just could you give us a general overview of how the foundry mix will look like, let's say, by '26, '27? How much of the sourcing will happen across those 3 foundries and for which applications mainly?

Yes. In '26, '27, the very, very vast majority of the production will still be in X-Fab because you know that those -- so the trend of the business are very, very slow. And in the future, X-Fab will remain our main foundry or partner.

We will now move to Marc Hesselink, ING Groep. [Operator Instructions]

Then the question is on -- also on China. If you move to this Chinese foundry and also with the earlier move to the other foundry, what are the impacts on your gross margin? Are they going to be similar? Or do you also get some gross margin benefits from it?

And maybe in the run-up to that, do you have some one-off costs from switching to the other foundry in the design phase, given that you use maybe some different toolboxes from the foundries?

Yes. On the second question, in what we want to do is we don't want to copy an existing chip in another foundry because, as you mentioned, it's a lot of development costs which are a bit wasted, and we want to focus our development effort on new products, on innovative products. And the first strategy is not to copy paste a product in China, but to develop -- and I repeat, with the China process, we want to develop new products that fit the need in China. Indeed to not waste, I can say it like that, to not waste our development efforts.

On your first question on the GPM, yes, it's always also depending on the market price and the market price in China is for sure different than the market price outside China. It means that I don't expect that the GPM will be improved, let's say, with this China process.

We'll now move to Robert Sanders of Deutsche Bank.

You've mentioned in the past that China is 2 to 3 years ahead on the powertrain. I was wondering what you thought that measure was for software-defined vehicles? And how do you play into software-defined vehicles? Do you have a particularly good content story there? It would be good to just hear a bit more of that. And related to that, do you need to be on the reference designs from big players like NVIDIA and Qualcomm going forward?

Yes, the software-defined vehicle will need exactly in the same way, sensors and drivers in order to sense, let's say, the environment of the vehicle and the driver to activate the different valves. That -- this -- The basic need will be the same for the -- with the software-defined vehicle than for the vehicle today. There are a lot of discussions with the OEM, and we are part of this discussion indeed to define how the sensor will be connected, let's say, to the ECU, that there is different options, they have different architecture with a main ECU in the car and some, let's say, secondary ECU on the different application of the car.

And the discussion is indeed will the sensor and driver connected directly to the main ECU or to the secondary ECU. Will the software be inside the product, inside the sensor or inside the ECU. All those discussions are ongoing.

And for sure, Melexis is part of the discussion with the OEM directly because it's really important for us to understand in advance how our product will be connected and if they need, let's say, a simple sensor or a sensor with more intelligence. But it's a bit early to answer the question. All I can say is that we are very much involved in those discussions with the OEM. And also the basic need of sensor and driver will not change.

[Operator Instructions] We'll now go back to Mr. Francois Bouvignies of UBS with a follow-up question.

I didn't have the chance to follow up on my previous one. It's -- Did I understand correctly that China is down year-over-year? I mean, Karen, you mentioned quarter-on-quarter seasonality, but you also said year-over-year, right?

Correct. Indeed, but every -- the whole Melexis is 18% down quarter-on-quarter, I mean, versus the year ago. And China is much less down -- but it is still down. The inventory correction is also impacting China.

That's -- the point I wanted to ask is China -- I mean, this is the first time I hear that they are doing some inventory correction in China. I'm sure it will happen or it would happen at some point. But the first time I hear China down year-over-year. When you look at the car sales in China, it's fairly healthy. The hybrid and EVs is very healthy. The outlook is okay. So I'm a bit surprised to have China down year-over-year.

At least the first company that I've been hearing, maybe I'm missing that China is correcting inventories in China. So can you give a bit more color on that?

I think a difference that we have noticed between China and the rest of the world is that China did not ask any pushout or any cancellation at the end of last year, while the rest of the world have requested a lot of pushout and cancellation, not in China. We didn't receive such a request from China.

Okay. I still don't understand why it's down year-over-year so much? I mean it must be inventory correction, but the demand is very strong. So I don't know, I'm a bit confused, but --

Yes, there are also European players in China that it's not -- who are not always doing so well.

We have another follow-up question. This time from Robert Sanders of Deutsche Bank.

Yes. Just relating to the last question, my last question about NVIDIA and Qualcomm. So if the intelligence moves to the zonal computer, then that leaves you doing a kind of slave sensor to those companies. So why would you not end up working with the NVIDIAs and Qualcomms on a reference design? I mean, certainly, Elmos is doing that. They're very excited that they're on these reference designs from NVIDIA and Qualcomm. Yet you didn't mention anything on that.

Yes. Today, indeed, I repeat what I said, we are in contact with the OEM mainly to define indeed the architecture and the need of the product.

As we have no further questions, Mr. Biron [indiscernible] -- sorry about that. We have one more question that came into the queue, sir. It is Nikos Kolokotronis of Van Lanschot Kempen.

I have a question on -- before it was mentioned that you expect yields to improve towards the second half of 2025. So can you provide a bit more color on what's causing this improvement? And is it related to the qualification ramp-up of production with the Chinese partner?

No, no, it's not linked to this. It's more linked to the -- let's say, it's more a pain of increasing capacity. The fab have increased their capacity as they build up, let's say, new equipment, and we are still suffering, let's say, for the ramp-up of those new equipment with bad yield. And it's why we still need some time, let's say, to digest the wafers with a lower yield to fix the technical problem. It's why Karen mentioned towards the end of this year we should see the result of all those activities. But it's more linked to a ramp-up of new capacity in the fab.

Perfect. And then my second question is on the inventory levels, which continued going up in Q1, currently standing at 210 days, which is pretty high. So can you comment a bit on how we think about this going forward over the next quarters? Yes, that's my second question.

Your question is about the inventory level at Melexis, I understand?

Yes, exactly, at Melexis.

Yes, we expect that to further increase as we are building up strategic inventory because we cannot exclude also. And I mean, that is for sure also a scenario to take into account that we grow first -- I mean, that we continue growing throughout the year.

And we know that when the pickup will happen, it will be a sharp increase. And we know also that the supplier which will be able to supply the part will win. Then we want to be ready with, let's say, the right part in the right inventory in order to be able to grasp new business when the pickup happens.

Okay. So do you think you are -- actually you're happy with these levels going forward in order to be ready for the pickup? Or do you want to increase a bit more, [indiscernible]?

We still want to further increase it.

We do not have any further questions at this time. I will turn the call back over to Marc Biron for any additional closing remarks. Thank you.

Thank you, operator. In summary, Melexis is navigating the current market condition and continue to focus on growth driver through innovation and strengthening our presence in China. The steps we are taking now are making Melexis stronger and will enable our customers to win without our target markets like automotive and robotics. Then we will report our Q2 results on July 30. And I want to thank you for joining our call and tell you goodbye. Thank you.

Thank you very much, sir. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Have a good day, and goodbye.