Soitec SA (SOI) Earnings Call Transcript & Summary

Hello, and welcome to the Soitec Q3 Sales for Fiscal Year Q3 2023 Conference Call. My name is Caroline, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand it over to your host, Mr. Pierre Barnabe, the CEO, to begin today's conference. Thank you.

Hello. Welcome to Soitec's Conference Call dedicated to the publication of the revenue for the third quarter of our fiscal year 2023. This is a quarter covering the period from the 1st of October and the end of December 2022. I'm Pierre Barnabe, CEO of Soitec. 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 revenue performance. And after that, we will open the floor to questions. I'm very pleased to report that we had another strong quarter in line with our full year target. With a revenue of EUR 274 million, Q3 '23 is slightly stronger than an already strong Q2 '23 quarter. This makes Q3 '23, our second best quarter ever. Compared to Q3 last year, we achieved a strong 32% growth on a reported basis. This is a combination of a 25% organic growth and a positive currency impact of 7%. Performance was driven by sustained growth in mobile communication and very sharp growth, both in Automotive & Industrial and in Smart devices. Another source of satisfaction is a strong growth achieved in FD-SOI wafer sales, which confirms the increasing adoption of our product family across our 3 end markets. Looking now in more detail at our Q3 revenue by end market. Let me start with Mobile Communications, our largest division, which accounted for 62% of our revenue in Q3 '23. Revenue in mobile communication reached EUR 170 million compared to Q3 '22. This is an 11% increase, excluding currency impact. revenue growth was driven by both higher volume and a positive price mix effect. As you know, our mobile communication business leverages the growing adoption of our 5G smartphones and WiFi 6 as well as the deployment of 5G infrastructure. Thanks to our flagship RF-SOI product, we strengthen our strong leadership in RF application for front-end modules. In Q3, we continued to benefit from the significant increase in the footprint of our RF product in every 5G smartphone as compared with 4G smartphones. This increase in RF content was amplified by a growing penetration of 5G high-end smartphones. Our performance has also experienced a tailwind from replenishment at some of our customers. FD-SOI momentum in mobile communication is progressing. In front-end modules in both sub-6 gigahertz and 5G millimeter wave. As for POI wafers, dedicated to RF filters for 5G smartphones, we are delivering wafers to many Tier 1 and Tier 2 customers who have confirmed the value of POI. They are still going through adoption phase, and this process of qualifying different modules of architectures should last few quarters. All in all, and as evidenced by the sustained level of growth achieved, we continued to see tractions in RF application despite a slower smartphone market in terms of total number of units sold. Our long-term agreement and some inventory replenishment, allow us to confirm our fiscal year '23 guidance. Going forward, we anticipate inventory digestions across the RF supply chain through 2023. We are closely monitoring the situation and working on different scenarios to assess the impact on our activity next year. Moving now to Automotive & Industrial, which represents around 14% of our total revenue in Q3. Revenue in Automotive & Industrial reached EUR 37 million. This is a sharp 84% revenue growth year-on-year, excluding currency impact, growth was essentially driven by volumes. We continue to see growing demand for automotive applications, driven by the increase in semiconductor content in the new generation of vehicles. Higher content is related to infotainment to autonomous driving and functional safety as well as to the shift to electrical and hybrid vehicles. In terms of products, growth in Automotive & Industrial is mainly coming from a strong surge in FD-SOI wafers, whereas Power-SOI wafers also delivered sustained growth. Turning now to smart devices, which represents 25% of our total revenue in Q3. Revenue from smart devices reached EUR 67 million. This represents a 50% organic growth compared to Q3 '22, supported by higher volumes and a highly positive price/mix effect. Demand is supported by higher connectivity, embedded intelligence, edge computing, cloud computing, more complex sensors and the need for lower energy consumption. The strong demand for smart devices applies both to consumer products and industrial sectors. The increase in FD-SOI wafers sales was particularly strong validating the value proposal of the FD-SOI technology for ultralow-power edge AI applications. We also recorded a solid growth in Photonics-SOI wafers used for data transceivers in data centers. Finally, sales of Imager-SOI wafers, which allow improved imager performances for 3D sensing applications remain at a sustained level. Let me now give you a quick overview of our year-to-date performance. Based on strong dynamics supporting each 1 of our 3 end markets, revenue for the first 9 months of fiscal year '23 came at EUR 745 million, up 28% versus the first 9 months of fiscal year '22. On a like-to-like basis, 9 months growth stands at 20%. And as far as our industrial performance is concerned, our teams continue to deliver an outstanding job. We maintain a very robust industrial execution in Bernin, France and our 300-millimeter SOI fab in Singapore continues to enjoy a good ramp-up in production following ongoing capacity increase. Looking beyond fiscal year '23, we are confident in the prospects of our SmartSiC technology. and its ability to accelerate the transition to our electric vehicles. As promised, we announced in December our new cooperation agreement with a leading SiC device maker, STMicroelectronics. And we are now -- and we are not stopping there as we continue to deliver wafers to multiple players. With this good performance since the beginning of the year, we are well on track to achieve our 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 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 Peterc from Societe Generale.

This is Aleksander from SocGen. So first of all, can you come back a little bit on the outlook for the smartphone market. We had a few positive signs with China reopening. Also, the comps are going to start to look quite easy for Android markets in general from the middle of this year, calendar year onwards. So I'd just like to understand if you now see a road to recovery for smartphone markets as a whole? Or should we, on the contrary, be cautious as we model your fiscal year '24 growth in mobile as the inventory glut works through the food chain down to the demand for your RF-SOI substrates. That's just one thing I'd like to understand. And then secondly, on POI, you say that you have further customers that are in the qualification process. And that will take a few quarters once all of that is concluded, would you see any need for further capacity expansion in POI? Or are you happy with the current, I think it's about [ 750,000 ]. So if you could elaborate on that a little bit.

Okay. Thank you, Aleksander. Then I will take the first question around the smartphone inventories, and I will let the floor for -- regarding POI to Bernard. Then for the -- there are 2 elements. There is a smartphones -- of smartphones visibility towards the volumes for the coming year and then the inventories. For the smartphone levels and what we consider, as you know, we are analyzing in depth our vision and what we see and we forecast and we're going to deliver these figures during the Barcelona Mobile World Congress end of February to give you really our view and our visions on the volumes of smartphones, including, of course, the 5G penetration we consider. Regarding the inventories, as we said, we are monitoring after a replenishment period we are monitoring very cautiously the evolution towards the whole RF supply chains, especially we anticipate inventory digestions. But this is something on which we are still working and working for many months in order to give you our guidance by spring and really the visibilty, we have and the impact on our RF activities for fiscal year '24. And what I suggest is Bernard, perhaps to complement and to answer the elements on the POI.

Yes, Pierre. Hello, everyone. So on the POI, you're right that we see traction and the value here is recognized by all the players. And -- but we are still on this qualification phase because the process is taking longer than expected. In terms of capacity, with the capacity at full fab of 750,000 wafer per year is the visibility that we have and this will be enough for midterm. Then -- and I want to highlight that we are not yet at this full capacity. This is a key point. And if we need to go to higher volume, you would be more on the long term, and this will be due only with customer commitment. But for the moment, with our plan, we have enough capacity. .

We will take the next question from Emmanuel Matot from ODDO.

Emmanuel Matot speaking from ODDO BHF. First question, how do you explain that your customers haven't started to reduce their order for RF-SOI wafers during Q3, considering the disappointing volumes of smartphones sold in the world? Second, how much of Soitec sales growth next year will depend on the reopening of China? Not an easy question, but can you maybe remind us how you are exposed to that country directly and indirectly? And my third question is about your SmartSiC technologies following the first contract with Microelectronics. Have you seen more traction? Can we expect new customers in the near term? What's your view on that?

Then on the -- I will do the -- I will give the same frame then for the first bunch of questions, and I will ask Bernard to take over the SmartSiC questions, if you don't mind. Then for the first question regarding the fact that we are resilient on fiscal year '23 regarding the smartphone market and the RF business is linked to 2 elements. First of all, we have benefited from a replenishment of inventories that were quite low a few times ago. And second, and it's the most important for me, element is that we are benefiting from, as you know, long-term agreements that is giving us visibility and in the needs and the deliverables towards the major customers that are using our technology. Data, as you know, more and more used because we are extending our footprint in each [firms] And it give me a good, let's say, a good rebound to the second question regarding the impact of China. Indeed, we are not thinking by countries, we are more thinking by type of phones and smartphones. And the more we are 5G and high end, the more we are selling footprints, the more we are selling, let's say, millimeter square, as you know, from Soitec with more and more features, of course, with a lot of RF, but more and more also FD and more technology to come in the future. Then the real impact is of economies, including China, is towards the level of quality and functionalities of the phones, then it's really the way we need to see. The fact that 5G was at 50% penetration rate in fiscal year '23, was, of course, a good rate. And we'll give you the rate of penetration for fiscal year '24 in 5G during the Barcelona Congress, but it is this metric we need to follow. Bernard for the SmartSiC.

Yes. So on the SmartSiC, after the announcement of the cooperation of ST, we are -- we continue to deliver a lot of wafers to ST and to our customer. As we already highlighted, we deliver wafers to customers around the 4 regions in the world. So this is something which is very key. And here, we are making progress. The value of this product is recognized by everyone. And depending on the customer, we are in the evaluation phase or qualification phase, so we are on track. And I don't know if we will share a few names later. But for the moment, many of our customers are working closely with us.

We will take the next question from Jerome Ramel from BNP Paribas.

A quick one on -- could you update us what the current capacity is in Singapore?

Bernard, you want to take over this one?

Yes. Today, we are around 50% capacity. So you know that in Singapore, we are growing step-by-step. And we continue to ramp, we talk about 40% of capacity a few months ago. Now we are around 50% of capacity in Singapore for our Pasir Ris 1 building. And you know that this Pasir Ris is going up to 1 million wafer.

Yes. Okay. Second question, there were some articles recently saying that China is looking more closely at FD-SOI ecosystem. Few years ago, there was some degree of collaboration, I mean outside of Simgui for FD-SOI maybe to be deployed in China. Could you update us on the situation vis-à-vis China and the potential of FD-SOI in China and with the current environment in terms of trade war and so on and what -- is China is still on the table for Soitec, how should we think about it?

Well, we are working towards China -- with China 2 ways. First of all, as you know, we are subcontracting production of 200 millimeters to a partner called Simgui, okay? That's the first element of our cooperation to China in SOI. And of course, we consider China as a very important let's say, customer and country in semiconductor industry, and we are selling finished goods to Chinese customers as we are selling across the world. There is no specific other elements and this one that are quite simple.

Perhaps I can add that regarding the FD-SOI ecosystem, what we see today that this FD-SOI ecosystem is getting stronger and stronger and whatever the region. So this is one thing which is very important for us. And is for that, that when you look at this, I want to come back on the capacity that you ask me, Jerome, Pasir Ris 1 is 1 million wafer, 50% currently ramping. But with the visibility that we had on the FD-SOI, we launched the extension of Pasir Ris to go up to 2 million later. So it's -- today, we are very confident on the progress that we see on FD-SOI.

And just to precise, Jerome, when we sell finish goods afterwards, you have Chinese foundries using our technologies, including FD-SOI to deliver final products, of course.

We will take the next question from Adithya Metuku from Crédit Suisse.

Yes. So I have a few questions. I don't know how many you can answer. Just maybe just quickly, just on the LTA. So I wondered if you might be able to say what proportion of your shipments looking forward are covered by LTAs at the moment? And secondly, given all the uncertainty around the mobile market and the potential for inventories to be adjusted as we go into your next fiscal year. Are you able to say anything at all on how we should think about automotive and industrial growth and smart devices growth into 2024? Those 2 divisions are slightly for black box nature, and it's very difficult for us to model those other than to say that they're just growing very strongly. So can you give us any color there? And then just on silicon carbide. I just wondered if you could talk a bit about how you see revenues for you from this agreement maybe conceptually just help us think about how we should model it? And any color on how to think about volumes from this agreement would also be helpful.

Great. on the first question, Adithya, we are not communicating details on the proportions of LTA. What we can tell you is that it is growing significantly because, of course, it's extremely important in the whole supply chain to increase visibility in a market that on the long run, is going to continue to grow and to be very demanding and asking for more and more deliveries than the LTAs, let's say, contract will be spreading out step-by-step, but we have a significant portion, but we are not communicating more. For the -- what we discussed on fiscal year '24, as we said, we are working on different scenarios regarding the mobile phones and then the impact on RF. You understood also that we are very confident in the growing aspect and engine of FD-SOI. And of course -- but you're going to see the combination of all these elements to give you a fiscal year guidance by spring as we promised reflecting all these elements and the scenarios we are working on today. Regarding silicon carbide volumes and information, we will not go further to what is today in the press release and what we have already announced for keeping confidentiality of this market that is under construction and for which there are a lot, a lot of different elements we keep confidential so far. And as soon as we'll be in a position to tell you, we'll tell you. But of course, you know already what the Bernin 4 capacity that will be opened by spring for first commercial wafers. And we have already communicated in the capacity of this factory. But for commercial contract, we don't communicate in volumes and value for the moment.

Got it. Am I allowed to ask another question?

What we say is 10% in fiscal year '26. Around 10% of our revenue will be related to SmartSiC in fiscal year '26.

Got it. Can I ask an additional question? Or shall I join the queue again?

No, go ahead, Adi.

Okay. Just one quick question just on FD-SOI. I'm thinking about it about the geopolitical issues. Clearly, FD-SOI has use cases in military applications given the nature. And also if the Chinese are unable to get the tools to move forward -- move further down into the smaller node sizes, there is a chance for them to use FD-SOI to get some of the benefits that they couldn't get using FinFETs and smaller nodes. So I just wondered, do you see any risk of FD-SOI kind of coming into the scope of potential regulations, et cetera, at a later stage? I don't know maybe not immediately, but maybe in a year, 2 years' time, especially given all the news flow around the Chinese wanting to use more FD-SOI. Any thoughts you have around this and how you think about it conceptually would be helpful?

Well, FD-SOI is not presenting particularity towards military applications or features compared to any other technologies like GaN or whatever, then it's -- there is no really particularity regarding that, and we are confident that FD-SOI will continue to be sold everywhere in the world. But of course, as we said several times, we're going to respect, of course, the lows and the limitation, if any, but we don't foresee and forecast for FD-SOI such problematics and functions.

We will take the next question from Francois Bouvignies from UBS.

Can you hear me, okay?

It's okay.

Okay. So I have 2 quick questions. The first one, I'm sorry, I joined a bit later in the call. But just if you look at the release, you mentioned some inventory increasing. And I think, Pierre, you mentioned that it was very low. And I mean, what's your assessment today because the smartphone market is going in a correction at the moment? So you are seeing a different trend you're still increasing when the smartphone market is decreasing. So I was wondering if -- how we should interpret your comments that it's increasing in a way that for 2024, should we expect some kind of effect of destocking on your product? That's my first question. And the second one is on the silicon carbide, we see a number of initiatives around splitting the silicon carbide wafers. And I was wondering, for example, a cold-split laser-based technology, which is, in a way, adding a lot of risk to add the SmartSiC at the same time. How do you see the combination with other cutting technologies out there on silicon carbide to combine in the market? And is it something that you see both at the same time being adopted or any impact on your business on silicon carbide would be helpful.

Okay. Then perhaps on your second question, Bernard, could you take over right now these questions regarding the different technology used to -- for cutting the silicon carbide and comparisons between our SmartSiC and the others?