Soitec SA (SOI) Earnings Call Transcript & Summary

Hello, and welcome to the Soitec Q2 '23 sales. My name is Caroline. I'll be a coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Mr. Pierre Barnabé, Chief Executive Officer, to begin today's conference. Thank you.

Hello, everyone. Welcome to Soitec's conference call dedicated to the publication of the revenue for the second quarter for fiscal year 2023. This is a quarter covering the period from the first of July to the end of September 2022. I'm Pierre Barnabé, Soitec's CEO. And together with me on this call are Bernard Aspar, our COO; Lea Alzingre, our CFO; and Steve Babureck, our SVP, Strategy. As usual, we will briefly comment on our sales performance. And after that, we will open the floor to questions. Before getting into our Q2 performance, let me say that I'm very pleased to be with you today. During my first month, I already had the opportunity to engage with some of you, and I'm looking forward to continuing our open and constructive dialogue and to getting to know more of those, I will soon have the opportunity to meet. Let's go straight to the second quarter, we performed very well. I'm very pleased to report that Q2 '23 was our second best quarter ever with a revenue of EUR 268 million. This represents a strong 39% growth on a reported basis versus Q2 last year. It breaks down between 28% organic growth and a positive currency impact of 11%. Performance was driven by sustained growth across the 3 divisions: mobile communications, automotive and industrial and smart devices. Beyond the strong dynamics supporting each of our 3 end markets, we also delivered a very robust industrial execution. As you may remember, production was slightly impacted in Q1 by couple of interruptions that took place at our Bernin industrial site. One was due to a power outage and the other was due to a strike action. Back in July, we told you that we were confident in our capacity to progressively make up for the lost production amounting to around 10 days. I'm very pleased to confirm that we have been able to progressively catch up, thanks to a strong execution in Bernin. Our 300-millimeter Singapore fab continuing to demonstrate a good ramp-up in production following ongoing capacity increase. Looking now in more details at our Q2 revenue by division and market. I guess that you are now familiar with our new reporting by divisions, which breaks down our revenue by division, reflecting our 3 end markets: mobile communication remains our biggest divisions, representing around 70% of our revenue in Q2 '23. Automotive and industrial, which is bound to be our fastest-growing market over the next few years, represents 13% of our total Q2 revenue. Finally, smart devices accounted for 17% of our Q2 revenue. So let me start with mobile communications. Revenue in mobile coms reached EUR 189 million. Compared to Q2 last year, this is a 22% increase, excluding currency impact. Revenue growth was mostly driven by higher volumes. It continues to be supported by the growing adoption of 5G smartphones and Wi-Fi 6 and by the deployment of 5G infrastructure. As you know, we have built a strong leadership in RF applications with our RF-SOI product family for front-end modules, while the RF content in every 5G smartphone is significantly higher than in 4G. In addition, the penetration of 5G and high-end smartphones is increasing despite a slight decline in overall global market of smartphones, volumes in calendar year 2022. FD-SOI is demonstrating growing adoption with design wins for both sub-6 gigahertz and 5G millimeter wave. In the millimeter wave space, major players have endorsed FD-SOI. Regarding POI for RF filters in 5G smartphones, several customers have confirmed the value of POI and are going through an adoption phase, a process slightly longer than expected due to the diversity of module architectures addressed. All in all, we continue to see a good traction in the RF market. Moving now to automotive and industrial. Revenue in automotive and industrial reached EUR 34 million. This is a sharp 80% revenue growth, excluding currency impact compared to Q2 '22 and a 40% increase compared with Q1 '23. Growth was essentially driven by higher volume. We continue to see increasing demand for automotive applications related to functional safety, and power and battery management for electric and hybrid vehicle, infotainment, autonomous and assisted driving. Growth in automotive industrial comes from a strong performance in FD-SOI and in Power-SOI wafers. Turning now for smart devices. Revenue from smart devices reached EUR 45 million. This represents a 28% organic growth compared to Q2 '22, supported by a volume increase. Demand is driven by higher connectivity, embedded intelligence in IoT, edge computing, cloud computing, sensors at lower energy consumption. We delivered strong growth in revenue across all product lines. FD-SOI, confirming a unique value proposition for ultra low-power edge AI application, Imager-SOI wafers, which allows improved imager performance for 3D sensing, Photonics-SOI wafers for data transceivers in data centers. Strong demand for IoT and edge computing devices across both consumer and industrial sectors. Let me now give you a quick overview of our performance year-to-date. H1 '23 revenue came at EUR 471 million, up 26% versus H1 '22. On a like-for-like basis, H1 growth stands at 18%, thanks to the outstanding performance achieved by the team in Q2. With this good performance in H1, we are confident to reiterate both our top line guidance and our EBITDA guidance for fiscal year '23. So let me confirm, we continue to expect fiscal year '23 revenue to grow around 20% organically, and we are expecting our fiscal year '23 EBITDA margin to reach around 36%. This guidance takes into account the current macroeconomic context. This ends my opening remarks. Thank you for your attention. We are now ready to take your questions.

[Operator Instructions] We will take the first question from Aleksander from Societe.

Congratulations on the strong sales you've just reported here. And so just for us to understand fully, should we now assume that everything that was missed in Q1 because of industrial action and power cuts is now caught up with this strong second quarter and now you're on a smooth sailing for the rest of the year? Or is there still any catch-up to do here? Secondly, if you could share your assumptions for the smartphone markets and for 5G units for the current year and for next year, so we understand how market trends tie with your guidance overall. And then a third one, if I may. Could you explain in more detail what's going on in POI? Why it's taking so much longer than you and as expected for you to validate and to onboard more clients beyond Qualcomm? I'd just like to understand what exactly is [ this play ] there?

Let's look across your 3 questions. First of all, we have fully cashed up the 2 difficulties we had in Q1 due to the electricity outage and due to the strike. Then now it is totally covered, and it has been done, thanks to a very, very active work and determination by the team. Regarding the 5G units, we are not communicating for next year, and we still remain in the range of EUR 650 million to EUR 700 million. This is what we see for this year. Next year is not something we are communicating on. Regarding the POI, it's back to what I said, but I would like to ask Bernard perhaps to complement what I've already tell you during the outlook I've presented. Then Bernard, if you can complement?

Yes. So on POI. So first of all, on POI, the value is recognized by the different players. And this is one of the things, and we are working with many players for different kind of application. However, it's -- we are still in this penetration phase. So the penetration phase means also that it's not smooth, but it's -- we are more on a bumpy growth. And why that is because the process for qualification is longer than expected and mainly due to the diversity of module architecture that can be addressed with our POI structure.

We will take the next question from Emmanuel from ODDO.

First, do you think there are some risks related to inventories from your key customers? Do you consider that some of them could review negatively their orders for your wafers in the coming quarters in a very challenging macro context? So that's my first question. Second, what about commercial negotiations for your silicon carbide technology? Anything to say new about that? Third question, have you seen some members of the management team leaving the company following the departure of the previous CEO? And my last question is about your hedging for this year. I know you are fully hedged on a euro-dollar rate of 1.18. But what about next year?

Okay. Then regarding the inventory, we are -- we have seen replenished, but healthy inventories with our direct foundries. Then after a very difficult and very tense year before, we see now inventory that is in line with what is expected for answering the different demands. This is really our observation so far. Regarding the silicon carbide, we cannot disclose as we told you, we're going to -- we expect to disclose commercial names before end of this year. But what we can tell you is that our ecosystem is building up step-by-step. We are making SmartSIC technology becoming a standard. It's something that, of course, takes times, but we are connected with all the stakeholders and players in this raising world and in the electronic vehicles world, to be sure that we're going to take the maximum value when the market will take off very soon. Regarding the executive members of the present, no one left. Some of them are exactly at [ submitters ] for me right now. The team is fully dedicated. We cannot deliver the Q2 result we have delivered if they were not totally involved and dedicated. And more than that, we are pleased to welcome new ones with Caroline Sasia, who joined us from the automotive industry, to take over the communication for the all group. Regarding the edge and the currency coverage, I would like Lea, if you don't mind, to give some explanation and points. Lea?

Hello, Emmanuel and hello, everyone. So for FY [ '24 ], we are only partially hedged. I would say 1/3 of our net exposure at a rate around 1.12.

We will take the next question from line of Jerome from BNB Paribas.

Two quick questions. What is the current capacity in Singapore? And the second question, can you address the situation in terms of price and cost. So how much of price increase are you passing to your customers? And what kind of inflation costs are you seeing in Europe and in Singapore?

Jerome, for the Singapore capacity, we'll give you the answer. Sorry, for the second part of your question, I missed the main points. Sorry about that. Could you repeat the second question?

Yes. In terms of price increase on your side to your customers and in terms of cost inflation, both in Europe and in Singapore.

Yes. For the Singapore capacities, Bernard, I will let you answer. But before on the price increase, as we already explained, we are working actively on containing the cost and thanks to long-term agreements with suppliers, thanks to long-term agreement with energy providers. We are monitoring the inflation costs, while we are working, of course, with the sales teams and with our customers to reflect a part of it. Then for this year, it's something we are monitoring, helping you, of course, to confirm our 36% EBITDA guidance. Regarding Singapore, Perhaps, Bernard, if you can comment?

Yes. Yes, in Singapore, so we continue our ramp. The ramp is very aggressive to deliver the number of wafers that we need to have. We are delivering as per plan. And today, we are in the range of 50%, but changing every day. So overall, we are in this range.

We will take the next question from line of Sébastien from Kepler.

What kind of visibility do you have on your business for the coming quarters given the weaker macroeconomic environment and weak smartphone volumes? That would be the first question. Second one, do you see any potential implication from the U.S. semi export restrictions in China directly, I guess not, but indirectly? Is there any specific implication? And the last one would be on margin for H1. Should we expect any negative implication on the margin side from the production interruptions that happen in H1 or any kind of exceptional item that we need to be aware before modeling margin in H1?

Then regarding the forecast for the coming quarters. This is what we told you. We have already anticipated smoother development in the smartphone industry and especially in the higher smartphone segments where we are, as you know, very, very strong. And we have a quite good visibility. We are confirming the range of EUR 650 million to EUR 700 million in 5G smartphone high end. This is really something we see for the automotive electric -- special electric vehicles, and what we are providing with FD-SOI and Power-SOI technologies, we see also a good visibility. Then all in one, this is helping us again to confirm around 20% increase for the full year, thanks to these key elements and the solidity of our demand and of our customers. Regarding the recent bands by the U.S. to some technological elements towards China, we have no impact on our side directly or even indirectly for the moment. We are monitoring, of course, cautiously. But as far as we see, there is no impact at all from these perspectives. Regarding the impact of the 2 incidents we had on Q1 on the margin, as I said, same thing for the revenue. It has been totally absorbed and catched up, then this is something we have been behind us and again, helping us to confirm the around 36% EBITDA.

And for the fiscal year '24, what part of this fiscal year is already covered by some long-term agreement, take up a contract or a strong commitment from your customer?

We -- as you know, Sébastien, we are not communicating beyond the end of this fiscal year, but we have a good visibility, as I told you, and we see the trends as we -- as you can expect on those 3 end markets, we are very active.

We will take the next question from Didier from Bank of America.

A couple of questions. One is a follow-up to Alek's question on POI. So I just wondered if you could maybe help us on the filter side. When you look at your sort of design win pipeline or engagement with customers that are currently the major players in filters, how much of the market do you think you can eventually address with what you have already in the bag? And then the second question, if you could perhaps help us on the top line in the first half in mobile devices or mobile communication give us the pricing benefit that you have baked in, in there?

Then for the POI and the filter, I propose Bernard to continue answering on this specific question. I will come back on the price. Bernard?

Yes. On the -- so again, on this POI today, we are working with many, many different players on that. Again, the POI value is recognized. And what we are addressing in terms of band is in the range of 1.5 to 5 gigahertz. This is the game on which POI can bring value. And depending of the players, they can use POI for addressing different band. And this is also linked to the module architecture that everyone is choosing for that, that the complexity when you are integrating the filter in the module is here. And here, we are working closely. But today, many refer on the qualification for the different months.

Thank you, Bernard. Regarding the smartphone performance, it's essentially due to the volume effect on H1. And as you remember, we are benefiting from extending our content and then our millimeter square footprint in any new smartphone or new generation smartphones that are put to the market, especially in the 5G mode.

We will take the next question from the line of Francois from UBS.

Can you hear me?

Yes, very well.

Right. So I have a couple of follow-ups to the previous questions. So the first one is on silicon carbide. Can you provide a bit more a timing when we should expect some responses from your customers. I mean should we wait mainly for 2023 now as we're entering the end of the year? Just to have an idea of when we should expect some announcements, whether it's by the end of the year or maybe more in 2023, given the activity? Just would be interesting to have this view. The second one is, Pierre, you talked in your remarks about the EBITDA target that takes into account macroeconomic context. I was just wondering what you mean by that? What did you take into account in your EBITDA to reflect that? And finally, your millimeter wave penetration, what do you assume for this year would be helpful?