Soitec SA (SOI) Earnings Call Transcript & Summary

Hello and welcome to the Soitec H1 Fiscal Year 2021 Results. [Operator Instructions] I will now hand you over to your host, Steve Babureck, to begin today's conference. Thank you.

Thank you, operator. Welcome to Soitec H1 Fiscal Year '21 Results. Good morning, good afternoon and good evening. My name is Steve Babureck, and I'm the VP of Corporate Development and Investor Relations for the company. Paul Boudre, Chief Executive Officer of Soitec; and Léa Alzingre, Chief Financial Officer, are with me on this call today. Before we start the call, I would like to remind you that this presentation is available on our website and the disclaimer can be found on Slide #2. Now let me give you the floor to Paul Boudre to kick off the presentation.

Thank you, Steve, and hello, everyone on the webcast. I really hope that you and your families are all safe wherever you are. We have a lot to cover today. So let me take you straight to Slide 5. So despite the challenging year so far due to the global pandemic and the difficult macroeconomic conditions, we are happy to report these first half results for our fiscal year '21. Soitec is quite resilient. Our growth story is intact, and we continue our exceptional trajectory in the semiconductor materials market. On the left side, you know the megatrends that push the limits of our semiconductor industry, i.e., 5G, artificial intelligence and energy efficiency. For each of these megatrends, we develop and commercialize highly differentiated engineered substrate to serve our strategic end market, i.e., smartphones, automotive, edge computing and cloud. Three figures I would like to insist on. In line with the guidance we gave you back in June, we delivered EUR 254 million of revenue in this first half, which means stable revenues at constant exchange rates and perimeter. We also delivered an EBITDA margin slightly above 30%, also in line with our guidance. Last but not least, we have generated more than EUR 100 million of operating cash flow. If you go to Slide 6, I want -- I will cover the financial highlights on this slide. You can visualize how these KPIs evolved over the last 3 fiscal years. The message regarding these KPIs is clear. Not only we are committed to generate profitable growth, but we are also dedicated to deliver growth that generates a strong cash flow. And there will be more details about how we generated this strong operating cash flow. The other important element that you should keep in mind is that a strong operating cash flow is mandatory for us to self-finance the capacity plans that will support our very ambitious revenue growth over the next 5 years. If you go to Slide 7 and before we discuss further the performance of this first half, let me remind you several guidelines we followed very carefully since the beginning of the COVID-19 pandemic. Priority number one, protect our people. Early on, we put in place organization shifts, and we have now a right balance between work from home and activities on-site to be efficient, sustainable and safe for everyone. Priority number two, maintain our operations, which means the fabs, but also our supply chain. Our fabs have never stopped. Priority number three, support our clients. And we are proud to report that the performance of our supply chain of our entire ecosystem, from equipment to materials, has been outstanding in this environment. Last but not least, priority number four, help our communities. And whenever possible, we continue to offer our support through various initiatives, such as masks, gel pieces to families in need, et cetera. So now let me take you to Slide #8. The fiscal year is somewhat a transition year for all of us at Soitec. And despite the stable revenues, we are very actively preparing the steep revenue growth and capacity ramp coming in fiscal year '22 and beyond. I wanted to give you an update on a few topics today. Regarding talent, our global organization has remained stable in H1 with around 1,600 employees. But we anticipate around 200 recruitments in the second half to support the growth in operations, innovations and business units, et cetera. We have also implemented a free share allocation's plan to all employees to acknowledge the efforts made by everyone to reach the company's targets and continue serving customers in recent months in spite of the constraint generated by the health crisis. We have also strengthened our top management team with the appointment of Bernard Aspar as COO; and Yvon Pastol joined us recently as EVP of our Customers Group. Regarding innovation, this is the DNA of Soitec. And we are developing new products and technologies to enable new applications in our strategic end markets. I will come back to that later in the presentation. Regarding supply chain, our main challenge is to continue to expand a robust supply chain to cope with our volume growth across several products using multiple manufacturing sites. Regarding raw materials, we continue to put in place long-term contracts with typically 2 to 3 years maturity terms. On the equipment side, we have also secured capacity expansion slots with our vendors and anticipate our steep capacity ramp. Now let me say a few words specifically on operations on Slide #9. I'm sure that some of you have already seen that we are raising our CapEx target for this current fiscal year. And this is important that you understand the rationale behind it. So from left to right, let's start with 150 millimeter. Regarding POI, our new engineered substrate for 5G filters for smartphones, we need to ramp our capacity faster than we were previously expecting. As you can see, we already doubled our capacity in H1 compared to the capacity that we -- that was installed in the second part of last fiscal year. We already told you that the targeted capacity is now 500,000 wafers per year. And we need to get this -- we need to get there pretty fast due to solid commercial tractions from several customers. Regarding GaN Hasselt, our CapEx plan are on track and our MOCVD tool is under qualification. Regarding 200 millimeter, in Bernin I, we were running at full capacity in H1. Most of the CapEx for this fab is related to maintenance CapEx. As you know, the additional volume growth for 200 millimeter is captured through our partnership with Simgui in China. Finally, on 300 millimeter. In Bernin II, we reached a lower utilization rate in H1, in line with the lower demand for our 300-millimeter products, but we will be back to full capacity in the second half of this fiscal year. I also wanted to highlight that Bernin II is the best -- is a best-in-class fab in terms of Industry 4.0 initiatives and was awarded Factory of the Year by the French business technology weekly magazine, using [ Novel ] and BFMTV for significant energy savings achieved by deploying artificial intelligence systems. In Singapore, we are also expanding capacity in several areas for refresh, epitaxy and, of course, SOI substrate capacity to prepare our production growth in H2 for the next fiscal year. Now let me say a few words about each business unit and if you can please go to Slide 11. And I will start with our RF-SOI business unit. This is our #1 business unit in volumes and revenues with a strong exposure to the smartphone market where RF-SOI is a standard for 100% of the smartphone RF front-end modules. I said it before and I will say it again, there is no smartphone without Soitec, there is no 5G without Soitec. 5G sub-6 gigahertz smartphones require an additional content of RF-SOI, and we continue to expand our footprint in square millimeters with new generations of products. 5G-millimeter wave smartphones contain both sub-6 gigahertz module and an additional module for millimeter wave. This means that the opportunity for Soitec is even larger than stand-alone sub-6 gigahertz phones. The recent multiyear supply contract announcement with GlobalFoundries regarding RF-SOI wafers for their most advanced solutions for RF front-end modules provides a strong evidence that we are increasing well positioned to lead the opportunity created by the 5G market. From a momentum standpoint and as we told you in April, COVID-19 has created a bit of weakness in the smartphone this year, and we expect the global smartphone market to decline by around 10% in calendar year -- this calendar year, calendar year '20, followed by a strong rebound in 2021. I wanted to remind you that the RF-SOI content per smartphone continue to grow and compensate any decline in smartphone unit. On the 5G side, we now expect a stronger entry of 5G smartphones in 2020 with around 20 million, 25 million units. And this number should more than double to at least 500 million units in 2021. Now let's talk about FD-SOI and turn to Slide 12. As a reminder, FD-SOI is a unique technology to address several key challenges offered by energy efficiency, AI and 5G semiconductor chip-based. So on FD -- FD-SOI can deliver lower power consumptions, increase security, enable embedded memory, integrate RF connectivity. And all of these can be packaged with a cost-efficient device integration. Today, this is now a reality confirmed with our first wave of adoptions. FD-SOI is being adopted in a wide range of end product, from cars to IoT, smartphone and smartphones, supporting the largest consumer brands. After many years of ecosystem development, a strong takeoff in the last couple of years, FD-SOI business is in a transition year. New products in automotive have been a bit slower than we had expected. The lack of foundry in China impaired some business relationships in the FD-SOI ecosystem, and the competitive environment has been tougher on us. Even if we are seeing a revenue plateau in 2020, we are very happy with the number of design win activities across the board between edge computing, with FPGA platform, voice and vision processors for automotive and smart home and, of course, 5G where FD-SOI is currently designed as an integration platform for millimeter-wave applications. So for FD-SOI, we are expecting a strong inflections in 2021 and 2022. If you go to Slide #13, I will cover the specialty SOI business unit. We have several products in this business unit addressing automotive, imaging and data centers end markets. That said, the product in revenues is Power-SOI and the main market is automotive. Automotive end markets has been weak since the second part of calendar year 2019 in a strong decline in 2020, and we expect a solid recovery in 2021. Imagers for 3D sensing follow a specific smartphone brand, and the demand remains sustained. Finally, photonics, we are expecting to grow at a very decent pace, thanks to data center traffic, traffic growth and technology transitions in optical transceiver. So let's move to Slide 14 and talk about the filter business unit. Regarding filters, our goal is simple: create a new standard for surface acoustic wave filters using POI-engineered substrate compatible for 4G and 5G. 5G offer us a perfect opportunity to differentiate our POI technology due to much higher requirements on the filter side compared to 4G. As shared before, customer traction is already here. And as you know, we announced a strategic business agreement back in July with Qualcomm. This new POI product and the strong commercial traction confirms that we can leverage our market technology capabilities across a wide range of semiconductor devices to enable new and unique applications. Our customer intimacy is, in this case, in the RF ecosystem, allows us to be positioned both as a reference innovation partner as well as robust industrial player. Moving to Slide 15 and covering EpiGaN business unit, we are very happy with these acquisitions, which was concluded, as you know, 1.5 years ago. The business has been integrated as a business unit within Soitec, and we have already seen many synergies on the technology and operation sides. Outlook remains the same for GaN epiwafers. Our ambition is first to penetrate base stations, power amplifiers in a meaningful way, then smartphones and later to penetrate the power automotive market. As shared earlier in the presentation, we must deploy our high-volume MOCVD capacity to accelerate commercial adoptions. Moving now to Slide 16 and covering compound business unit. So regarding compounds, I will focus today on silicon carbide as we are developing a unique engineered substrate to address the electrical vehicle markets and also industrial markets and where we have already received strategic interest from automotive device and system makers. Where do we stand in our development? We are working with Applied Material to develop the technology under a joint development agreement. Our pilot line is now fully operational. We are now building R&D samples that can ship to customers. And finally, we will deliver qualifications products in Q1 '21. Moving to Slide 16 (sic) [ Slide 17 ] and covering Dolphin Design. Dolphin Design is a semiconductor design company in which we now own 80%. The remaining is owned by MBDA. As a reminder, main synergies for Soitec are about the IP business related to FD-SOI, especially what we called ABB, or adaptive body biasing. Tractions on that front is very strong with -- which customer -- which supports the development of the, obviously, FD-SOI ecosystem and accelerates the demand for FD-SOI substrate. So at this stage, this will conclude my remarks related to the business unit. I will now leave the floor to Léa to discuss our financial results.

Thank you, Paul, and hello, everyone. You can go on Slide 19, please. In line with what Paul have disclosed in his information, we are happy to report that the group performance is in line with our expectation and with our annual guidance, flat revenues and EBITDA margin around 30% despite the current difficult environment related to the COVID-19. We significantly improved our operating cash generation. We were able to maintain a 30% EBITDA margin despite the flat revenue and the fact that we continued our efforts to structure the group in order to prepare the growth in FY '22 and beyond. Slide 20 is showing the sales performance. We have disclosed our H1 revenues in October, first, no surprises there. Let me come back to several important items. We had a flat revenue at constant FX and perimeter. Compared to H1 last year, 150- and 200-millimeter sales growth reached 15%, excluding currency effects. Most of the growth came from a more favorable product mix, essentially, more RF-SOI and less Power-SOI. In addition, [ we're excited ] from the continuous ramp-up in the production of 150-millimeter POI wafer for RF [ and Power ] at our Bernin III factory. Regarding our 300-millimeter business, sales decreased by 16% (sic) [ 15% ]. Sales of RF-SOI 300-millimeter remains at very high level. On the other hand, sales of FD-SOI were lower than last year. And finally, sales in royalties and other revenues are mainly related to Dolphin Design and EpiGaN. On Slide 21, you can see the gross margin. Our group reached EUR 77 million of gross profit, which represents a 30.4% gross margin rate. As stated, we've been cited for most favorable bulk purchase price, thanks to our LTA with the bulk supplier. On the other hand, a few headwinds impacted our gross margin. Depreciation grew faster than sales due to the investment plan required in the last few quarters in order to support the growth. Also, our B3 factory for POI products is now in its early stage of [ home birth ]. On Slide 22, you have the current operating income. From this EUR 77 million of gross profit that I just commented, the group generated EUR 37 million of current operating income, which is almost 15% of our revenue. This fiscal year is a transition year. We are and we will be flat in revenues mainly because of the COVID-19 context, but we need to prepare the growth expected in FY '22 and beyond, which is why we continue to invest in R&D and to expand the staffing of the group in multiple areas. Therefore, R&D net costs increased by EUR 1.5 million, which represents a 10% increase as compared with last year. We added more efforts to maintain leadership on our SOI business and to further develop our POI and silicon carbide road map. Regarding SG&A, we keep on turning -- reinforcing the group, which is more diverse now in terms of geographic, of customers, of product, in order to prepare the group for the fiscal year '22 growth and beyond. As a consequence, SG&A expenses increased by EUR 2.5 million as compared with the same period last year due to employee expense rise because of new hiring during last year and because higher employees free share expenses related to plans approved during previous fiscal year, especially with the increase of the share price. On Slide 23, the net profit. At the net income level, our net profit decreased from EUR 45 million last year to EUR 22 million at the end of September 2020. We did not report any exceptional item in H1 this year, whereas last year, we had a positive impact of EUR 1.8 million related to the disposal of a building. Regarding our financial results, we reported a loss of nearly EUR 10 million this year due to financial expenses mostly related to the noncash interest on our 28th convertible bonds and a foreign exchange-related loss of EUR 6 million due to an unfavorable FX rate effect. This FX rate evolution does not have an effect on our operating results because we were hedged. Finally, our income tax continues to benefit from tax loss carryforwards, and we did not plan any significant change in our income tax rate. On Slide 24, just a quick look at the EBITDA and EBITDA margin as this is our main profitability indicator in the guidance. We reached 30.4% margin, in line with the last year and in line with our expectation for the full year, same headwinds than gross margin, except depreciation of cost. We maintained almost the same EBITDA margin as last year despite the increase of the R&D costs and SG&A expenses with a flat revenue. If we look at cash and balance sheet now on Slide 25. Another good achievement for the period is a strong improvement of the group operating cash flow. With a flat EBITDA, the cash improvement has been driven by a better management of the working capital that is decreasing by EUR 31 million as compared with an increase of EUR 28 million last year. Receivables are down by EUR 60 million. Inventories are up by EUR 24 million to meet sequential sales increase expected in the second semester. Combined with the lower tax paid than last year, operating cash flow improved from EUR 36 million in H1 2020 to more than EUR 101 million in H1 2021. On Slide 26, you can see that we had a strong increase in the cash position from EUR 191 million in March 2020 to EUR 291 million at the end of September 2020. Obviously, this amount does not include the EUR 325 million convertible bond issued on the third of October. The free cash flow are positive at EUR 54 million. Cash out for CapEx amounting to EUR 48 million, and they were mainly used for industrial capacity investments both in France, in our B3 factory used for POI products as well as in Singapore for SOI and epitaxy capacity. And these inflows are positive as well because of the EUR 58 million first drawdown on the EUR 200 million long-term loan granted by Banque des Territoires as part of the NANO 2022 plan. On Slide 27, our balance sheet. It remained very strong in H1. I already commented the cash position of EUR 291 million. On the debt side, we ended the half year with a total gross debt of EUR 297 million. Noninsurance assets are driven by CapEx. Current assets and liabilities are driven by seasonality effects versus March 2020 and by working capital management. Finally, a few KPIs to underline the strength of our balance sheet on Slide 28. All in all, the balance sheet structure reinformed during this period with equity up EUR 25 million. Net debt decreased from $54 million to $5 million, thanks to the cash generated from operating flows during this period. Liquidity is at high level and further facilitated by credit lines and long-term loan from Banque des Territoires that will secure our future development as well as our convertible bonds issued early October. On this note, I will hand the floor to Paul to comment on our outlook.

Thank you, Léa. So regarding our fiscal year '21 guidance. On the revenue side, we continue to expect a flattish growth compared to fiscal year '20. On the EBITDA side, we reiterate our -- that our margin should be in the range of 30%. On the CapEx side, we are now expecting a cash out of around EUR 135 million versus at least EUR 100 million previously expected. And this revised CapEx plan is mostly related to the strong momentum we are seeing for our POI products. Now if we look at the situations regarding fiscal year '22, back in June, we were expecting around EUR 800 million in fiscal year '22 or $900 million based on a euro-dollar rate at 1.13. So based on current analysis of our end market dynamic, especially on the smartphone side and based on our customer demand dynamics, we are now expecting revenues to be above $900 million in fiscal year '22. As a reminder, several tailwinds should fuel our revenue growth in fiscal year '22. We expect a strong boost coming from 5G, which will impact many product lines as discussed before. I'm talking about RF-SOI, POI, FD-SOI and GaN. We also expect a recovery in automotive for Power-SOI and growth in edge computing for FD-SOI. So to conclude, after a solid, resilient year in fiscal year '21, we are preparing the entire company to grow again very fast in fiscal year '22. Now this will end our preliminary remarks, and we can now turn to the Q&A session. Operator?

[Operator Instructions] Our first question is coming from the line of Jerome Ramel from Exane BNP Paribas.

Yes. A question -- two questions. First of all, what happened to the account receivables, which explains a huge working capital swing? So I just like to understand what were the movement behind. And second question, Paul, how do you explain the stronger-than-expected POI demand? Is it because your customers are becoming more successful? Or is it because you -- your technology is getting more market share and maybe more customers? So if you could shed light on the POI dynamic.

Jerome, thanks for your question. So maybe we'll start with the first question on POI demand for Paul, and then we'll ask -- take the second question with Léa.

Jerome, thanks for the questions. Yes. I would say, on the POI, it's clearly [ a boost ] situations. We are with the #1 customer that is going in the market with our product. We are getting really market tractions. The value proposition of our product at the system level is also rewarding this first customer that is going to market. As a consequence, the volume -- the initial volume is accelerating, and that's very good news because this is a market reward here. On the second side, I mean we are obviously now working with many other customers that are in late qualification phase or at the beginning of manufacturing decisions. Léa, maybe if you want to take the second part?

Yes, of course. So as you know, we have a seasonality effect, and our H2 is always higher than H1. In March, we had a very high level of invoicing. Whereas for H1 2021, the revenue and the invoicing was better spread over the month that's why we were able to collect EUR 60 million worth of receivable during the period.

The next question is coming from the line of Emmanuel Matot from ODDO.

Emmanuel Matot speaking from ODDO. Three questions from me, please. First, GlobalFoundries is speaking about $4.5 billion of design wins for its 22FDX platform. It is a very high number. What does that mean for Soitec in terms of volumes of FD-SOI wafers? And do you have visibility regarding the ramp-up of the related orders from that customer? Second, I was surprised to see that the new iPhone 12 has a 5G-millimeter wave module in the U.S., which is doubling SOI content compared to sub-6 gigahertz. In your financial target of more than EUR 800 million worth of sales for fiscal year 2022, are you taking into account the significant number of 5G smartphones to have this millimeter wave module? Or is it pure upside for you? And my last question, do you believe that some technologies could disrupt your RF-SOI business? Or do you think it will remain as a start-up for many years regarding smartphones? What are your latest view on that key topic?

Thank you, Emmanuel. Thank you for the question. So I will start with the number one question. So Regarding GlobalFoundry. Yes, GlobalFoundry is basically winning a lot of new designs that they are turning into a ratio for them in terms of revenues. The -- so this is a good news, right? I mean this is clearly a good news. Why? Because if you think about 5G-millimeter wave, if you think about WiFi 6, if you think about Bluetooth, if you think about AI, yes, the leaders are moving into this technology. And this is obviously a fantastic opportunity for FD-SOI. Now how does it turn into wafers for us? Depending on the stage of where these major customers are today, which is between the first day part or the constructions of the design. It takes an average 18 to 24 months to get these wafers in manufacturing. So that's the reason we always said from the beginning that our fiscal year '22 will be starting to be loaded -- in second part of the fiscal year, we'll be starting to see some of the growth in -- for this type of innovation that FD-SOI will bring. On 5G-millimeter wave, yes, what we have seen, like you, is that millimeter wave is -- obviously, first, I would say, 5G is already on the market. And that was the big things that we were all expecting to see in 2020. The good news is that all the top phone makers have now switched to 5G. And the first adoption is sub-6 gigahertz, which is already a significant improvement in terms of millimeter square on the smartphones. So that's the first given that we can now confirm. When we opened the boxes, we have seen one brand coming with 5G-millimeter wave, which is a very important news because 5G-millimeter waves, we could have seen it coming later in the game. Now what is true is that on these current generations, it is done with no SOI insight on the millimeter wave. It's done with mainly bulk with the consequences that the performance is not really what it should be. The power consumption is lacking. And so we know that we are now developing and working with the phone makers for these second generations of millimeter wave product that will be enabled we believe in '20 -- in calendar year '22 than more than '21. But nevertheless, this is a beautiful growth path for RF-SOI and FD-SOI because this millimeter wave second generations of product will clearly embrace our product road maps for the futures because we are enabling these low-power consumption, we are enabling this performance that is needed. And you don't want to have your smartphone to become a heater in your pocket. So this is very, very important. On the third question that is RF-SOI, do we see competitions here? We are paranoiac about competitions. But I can tell you that I do not see any major significant technology that can really come and eat today our position in this field. So we are confident to stay the leader. We are confident to continue to grow this market, sub-6 millimeter wave. And -- but we are paranoiac about it. So we are obviously working on all the options.

The next question is coming from the line of Varun Rajwanshi from JPMorgan.

I have a couple of questions. First one is on your EBITDA margin evolution into the second half of this fiscal. The implied EBITDA margin is approximately flat. And I'm just trying to understand, given the 35% acceleration in sales growth, you also mentioned that Bernin II fab will be back to full capacity in the second half. Why are you not seeing some amount of leverage on the EBITDA margin front? I.e., are you being conservative for your full year guidance? The second question is on free cash flow generation. And first of all, congratulations on a great job in the first half of this year. But looking into the second half, your working capital is again likely to go up because you have -- the seasonality is such that you have a more second half loaded revenue profile, so the receivables are likely to go up. The CapEx would also go up. You will probably end up spending more than EUR 85 million in cash CapEx in the second half. So how should we think about free cash flow in the second half? And then going forward -- and is there any long-term working capital target that you have going forward? And my final question is for you, Paul, on the RF-SOI content in 5G models that have already been launched. So you have your own content assumptions for the purpose of internal modeling for 5G RF-SOI content. But seeing the models in the market today, how do you see the RF-SOI content in launched 5G devices versus your content assumptions? Is there any upside to that?

Thanks, Varun. Okay. We'll start with the two financial questions. But as you know, remember, we -- the only guidance and forward-looking statements are about the -- are related to the EBITDA margin. So maybe, Léa, on the question.

Okay. So maybe, Varun, your first question regarding the EBITDA margin, so we confirm our guidance of a flat EBITDA margin for the full year. We will have some expenses that has been postponed from H1 to H2. Regarding the current economic context, especially in Q1, the level of external expenses was very, very low. And remember, we are preparing ourselves for the growth. So we are continuing investment both in R&D and the situation of the company in SG&A. Regarding your second question, as Steve just said before, we are not doing any guidance on cash flow. However, we know that during H2, we will have some headwinds on working cap due to the building up of inventory to prepare the FY '22 growth. And we will have probably a high level of invoicing -- invoice expected in March 2021. So we will not have the same trend as during the first semester. Maybe, Paul, I can give you the floor for the last question.