Soitec SA (SOI) Earnings Call Transcript & Summary

Hello, and welcome to the Soitec Full Year 2023 Q4 Sales Conference Call. My name is Persiline and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Pierre Barnabe, the CEO, to begin today's conference. Please go ahead, sir.

Hello, everyone. Welcome to Soitec's conference call dedicated to the publication of the revenue for the fourth quarter for fiscal year 2023. This is a quarter covering the period from the first of January to the end of March 2023. I'm Pierre Barnabe, Soitec's CEO. Together with me on this call are Bernard Aspar, our COO; Lea Alzingre, our CFO, and Steve Babureck, our SVP strategy. As you read in our press release yesterday evening, Bernard I decided to leave the company in August to take up a new challenge. I would like to take the opportunity on behalf of Soitec to thank Bernard for the variable support he has provided during the leadership transition of the past 15 months and for his extensive contribution to the company's success over the years. Now let's have a look at our performance. I'm very pleased to report that we delivered another record quarter and that we ended the year in line with our full year guidance. With a revenue of EUR 344 million, Q4 '23 was our best quarter ever. Compared to Q4 last year, we achieved another strong 22% growth on a reported basis. This is a combination of 16% organic growth and a positive currency impact of 6%. Performance was driven by further sharp growth in Automotive and Industrial, sustained momentum in smart devices and slower growth in mobile communication. What does it mean for full year performance? Based on our strong dynamics supporting each of our 3 end markets, fiscal year '23 annual revenue also broke a new record at EUR 1.1 billion at 26% versus fiscal year '22. On a like-to-like basis, annual growth reached 19%. This is in line with the guidance of around 20% that we gave 1 year ago. Thanks to this robust revenue performance and to a continuously strong industrial performance, both in France and in Singapore, we confirm that our full year EBITDA margin will be around 36% as planned. I would like to thank once again all my teams for delivering such an outstanding performance. Looking now in more details at our Q4 revenue by end market. Let me start with Mobile Communications, our largest divisions, which accounted for 64% of revenue in Q4 '23. Revenue in Mobile Communication reached EUR 220 million. Our Mobile Communications business continued to be supported by ongoing growth of Soitec content within smartphones, further adoption of 5G smartphones and WiFi 6, 6e and 7 as well as by the deployment of 5G infrastructure in the context of a global market slowdown. Compared to Q4 '22, our Mobile Communication revenue was up 5%, excluding currency impact, essentially reflecting higher volumes. Thanks to RSSY product, we maintain our strong leadership in RF application for front-end modules. In the context of weaker smartphone sales globally, we continue to benefit from the significant increase in the footprint of our RF products in every 5G smartphone as compared with 4G smartphones as well as a growing penetration of 5G high-end smartphones. We also benefited from strong long-term agreements with our key customers. Going forward, inventory absorptions in the smartphone market supply chain for this quarter and the next one will result in lower performance in the Mobile Communication business. On a full year basis, we expect to offset it by continued strong demand for Automotive and Industrial and Smart devices. As for the sales of FD-SOI wafers for front-end modules, the momentum remained very positive. Regarding POI wafers dedicated to RF filters for 5G smartphones, we are excited to confirm the recent traction with the signature of a new partnership with SAWNICS, a high-end Korean foundry specialized in RF filters. Through this partnership, SAWNICS will deliver a process design kit to accelerate the design of high-performance RF filters based on our POI substrate, giving fabless companies better access to a powerful filter technology. We continue to work with several customers. We have confirmed the value of our POI and are currently qualifying different module architectures. Moving now to Automotive and Industrial, which represents around 40% of our total revenue in Q4. Revenue in Automotive Industrial reached EUR 47 million. This is a sharp 99% revenue growth year-on-year, excluding currency impact. Growth was essentially driven by volumes, but also by some price effect. Last year, we benefited from additional demand related to post-COVID recovery and next year should go back to normalized numbers. We continue to see growing demand for automotive application driven by the increase in semiconductor content in the new generation of vehicles. Higher demand for automotive substrates is related to infotainment, to autonomous driving and functional safety as well as to the shift to electric and hybrid vehicles. In terms of products, growth in automotive and industrial was supported by Power-SOI wafers, which continued to deliver sustained growth FD-SOI wafers, which also had another strong quarter. We also recorded our first sales generated by our SmartSiC offering. We are progressing well on the qualification process with STMicroelectronics. And we continue to deliver SmartSiC wafer to multiple players. We are on track with our road map and our increasing confidence in the prospects of our SmartSiC offering, a fundamental product to accelerate the transition towards electric vehicles. Turning now to Smart devices, which represent 22% of our total revenue in Q4. Revenue from Smart devices reached EUR 77 million. This represents a 25% organic growth compared to Q4 '22, supported by higher volumes and also a positive mix effect. Demand is supported by the need for more complex sensors, higher connectivity functionalities and embedded intelligence leading to more powerful and efficient ships for edge artificial intelligence, data centers and cloud computing. This strong demand for smart devices applies both to consumer products and industrial sensors. The increase in FD-SOI wafer sales was particularly strong validating the value proposition of the FD-SOI technology for ultra-low power edge AI applications. We also recorded a strong growth in Photonics-SOI wafers, which provide high-speed connectivity solutions for optical connectivity in data centers and chip-to-chip supporting ongoing artificial intelligence and machine learning developments. Finally, sales of major SOI, which allowed for improved image performance for 3D sensing applications remain at a solid level. So overall, we delivered a strong end to our fiscal year '23 in the context of a slower smartphone market. Let's now turn to our prospects, starting with our fiscal year '24 outlook. As indicated earlier this month, we expect our fiscal year '24 revenue to be stable on a like-to-like basis with an anticipated 15% organic decline in H1, followed by a strong rebound in H2. As already mentioned, the ongoing inventory correction in the smartphone market is going to have a negative impact on our Mobile Communications business, especially during H1 '24. On a full year basis, we expect to offset this weakness in mobile with strong demand in both Automotive, Industrial and Smart devices. Regarding EBITDA, we expect our fiscal year '24 EBITDA margin to remain stable at around 36%. During fiscal year '24, we anticipate significant growth in each of our 3 end markets. Indeed, we are managing our business to reach in fiscal year '26 targeted revenue of around $2.1 billion as compared to revenue of $2.3 billion communicated in April '22, on an EBITDA margin target of around 40% at EUR 1.1 to U.S. dollar exchange rate. These targets are sustained by Soitec's strong portfolio with further growth in both existing products meaning FD-SOI, RF-SOI, Power-SOI and Photonics-SOI and new products, especially SmartSiC, POI and GaN. We'll provide more information during the Capital Market Day that we will host on the 8th of June in Paris together with the presentation of our full year results. This ends my opening remarks. Thank you for your attention. We are now ready to take your questions.

[Operator Instructions] We will now take our first question from Aleksander Peterc from Societe General.

I just have 2. The first one will be, what is the level of confidence which you have at the moment on your indication of a strong rebound in the second half? I'd like to understand that this is already prebooked or is it related to having depleted inventory by the end of the first half, which will be marked by a lot of destocking? And are there any risks to this prediction if there isn't a strong recovery in smartphones in, say, calendar second half '23, if the market nearly flat line, would that jeopardize your guidance for the year? That will be the first question. And then the second, just on POI, if you could provide us with a revised time line for the addition of significant new customers in filters after the announcement of your cooperation with SAWNICS.

Aleksander, then, in terms of confidence, we see today, we have a backlog today that is at a healthy level compared to the years we have experienced within Soitec that give us a certain level of confidence. And of course, we are observing in details the bullwhip effect of -- within the value chain. And today, we see the range of 2 difficult quarters and a strong rebounce that will be driven by several elements. First element, continued growth in 5G sales within a sluggishing smartphone business. And second, an extension of our content because, as you know, we see featured applications moving on. Millimeter wave is, of course, an example, but we see more and more traction around WiFi 6, 6e and beyond 7 with the significant market share we expect to capture in these domains. Then if you look at, let's say, rebound within overall smartphone industries, increase in 5G propulsion and shares and extension in content will sustain these stronger bonds. That will be, of course, accompanied by a continuous growth in Automotive and Industrial as well as Smart devices for FD-SOI, for Power-SOI, Photonics, but also SmartSiC for which we expect also the starting of good revenue. For the second question of POI, you remember that we were expecting to deliver to you some good news before end of fiscal year '23. Then we have the good news that this framing, the solidity and the seriousness of our offer that is really providing a solution open and the fact that SAWNICS that is specialized in filters industry has decided to work closely with us from a technology and product point of view has not been done by accident and by hazard, it means that behind customers are interested. We are working very actively with all these customers, many customers. We cannot disclose for the moment names. We expect by end of calendar or fiscal year '24 to disclose 1 or 2 names that will be, of course, one of the sustainability of this POI. But really after the adoption phase, we see a pickup that is extremely encouraging and this SAWNICS news is really framing our future.

Can I just have a very quick follow-up on FX. Could Lea provide us with the current situation on how much revenue is hedged and what rates for the fiscal year '24.

Okay. Hello, everyone, and thank you for your questions. So for FY '24, we have still hedged about 40% of our revenues at an average rate around 1.12. So no significant change as compared with the previous communication, last January. And of course, we are monitoring very closely the FX rate in order to adjust the percentage hedges on a monthly basis.

We will move on to our next participant, Sebastien Sztabowicz from Kepler.

Coming back to the departure of Bernard next summer, could you please help us understand how you will manage the company knowing that the COO will be leaving the company, who will organize the team and so on? And what is the mood of the executive committee today? You see, I would say, some tension or something like this? That would be the first question. The second one is linked to the SAWNICS partnership. Should we understand that SAWNICS will be the main foundry for POI going forward? Can you please elaborate a little bit on this partnership, how it will ramp in the coming months?

Okay. Then for the first question, the next setup, it's quite simple. As you know, all the executive committee was part of the same team, and Bernard was taking care of supply customers and divisions. And these leaders will directly report to me, then we will have cohesive and current Executive Committee after Bernard departures, for which I would like to thank him because he has bring 15 -- 18 months as a whole for a transition in leadership, a smooth transition that has been very helpful for me, of course, to enter into the complexity of the company, also to meet each other and to connect with everyone, including, of course, CEO partners of our customers and suppliers, then it's extremely important to have benefited from the experience of Bernard and I will ask him to perhaps to make a comment afterwards. Then in terms of mood, we worked all together on building our business plan with a target to reach $2.1 billion revenue by fiscal year '26. And I can tell you, the whole team is fully dedicated and concentrated to this target. Then I have a cohesive organization around me, very strongly dedicated, very good professionals at extentlevel, but also underneath. And thanks to the smooth transitions, I have discovered incredible talent in this company. Then I'm very confident for the futures of the management and the drive of this company to reach our targets to fiscal year '26 and beyond and to deliver different types of products towards different types of customers and markets. Then perhaps Bernard, you can tell us a few words from you.

Yes. Thank you, Pierre. Hello, everyone. I will give you a few comments here on my departure. So you know that after 30 years of working on engineering [indiscernible], including SOI and after 17 years at Soitec, I think that, first of all, I am very proud about what I realized with all Soitec employees in terms of value creation for the company through growth of our product portfolio, which is now very comprehensive on the different market segments, on our strategic positioning across the value chain and on profitability. So -- and again, this result of fiscal year '23 in a complication demonstrate again this. I believe that in Soitec, we have built a very powerful machine to deliver added value engineer substrate. And we have, as Pierre highlighted, just a strong team. So I am very confident on the future of Soitec. However, I have decided to leave the company and to move for the next step for my career and to take new challenges. And I would like to take this opportunity also today to thank all of you who are supporting Soitec for many years. So thank you and we'll continue to do that.

Thank you very much, Bernard, again. Then for your question, Sebastien, on SAWNICS, engagement of SAWNICS is a significant step on because It's a first specialized foundry providing offerings to the market. And this foundry SAWNICS is well recognized in serving SOW filter market, SOW market. They serve several major and many smaller RF fabless companies. And we cannot disclose the name, find by yourself. And this engagement will accelerate adoption of POI for sure. Last point, we need to keep in mind that many of players are vertically integrated. And of course, we are engaged with all of them.

We'll move on to our next participant, Francois Bouvignies from UBS.

Two quick ones, if I may. The first one is coming back to the to the recovery that you expect, Pierre. Like strong recovery and you said in the release that it's going to last 2 quarters. However -- I mean if we look at the growth investment of smartphone, it actually last more than 2 quarters. I mean for all the kind of products you started to see after few other products. So I wanted to know like how do you evaluate the risk that it would last more than 2 quarters? I mean do you take also into account in your guidance the fact that 2 quarters and that it's over. I mean you see the strong quarter straight away? Or if it lasts more than 2 quarters, I mean, what kind of the risk to your guidance is, I mean, just trying to evaluate how aggressive you are in your assumptions. In other words, you can maybe give more details on the underlying assumptions you have in your guidance? And the second one is on silicon carbide. You mentioned that you had some revenues coming through for the first time, which is, I guess, a key milestone especially with STM. Can you provide an update on the discussions you have with other customers' potential, any time line you could provide. You have been something for some time now? And should we expect some announcements in the near future?

Francois, for the assumption, as you know, we worked really in details on different, let's say, that has giving us this view of around 2 quarters of, let's say, difficult markets and inventory digestions. It's linked to the fact that calendar year '23 for smartphone industry is sluggishing after a big drop last year. But calendar '24, meaning the Q4 fiscal year '24 is supposed to be quite strong with the rebound in the smartphone business, taking into account that the penetration of 5G will continue to increase. Then what our assumption is 60% this year will be 70% next year, then we see an increasing volumes by hundreds of millions of 5G smartphone. That is, as you know, fueling a lot of sales and appetite for our products taking into account that the adoptions of new features is making us confident on the increase in content. That's the reason why we see around 2 quarters by mitigating this risk and as I said, we have a healthy level of backlog as it is today compared to the years we have experienced within Soitec. But of course, it's hard work. And again, in the same time, we need to keep in mind that we need to continue pushing hard the sales of other products within Mobile Communication. We were mentioning POI, FD-SOI and also pushing hard and continuing to increase in Automotive, Industrial and Smart devices that is a full of hope and promise. Then this is really our assumption and the observations, top-down bottom-up of the market as it is today and our situation and positioning in this market. Talking about SiC, you're right to mention that this first revenue generated is a good signal. It's something that is also showing that -- and this is what we say for -- what we have been saying for the last beginning is that we are delivering on plan from a technology point of view, from a supply chain and manufacturing point of view and from a customer point of view. And the fact that we are delivering towards customers first elements, first wafers is making us let's say, also confident to continue to step by step increase our positioning and our revenue in this industry. Giving you a precise whatever date of even quarter for announcing another customer is a bit too early. What we can tell you and repeatedly is that further to the signature of our first agreement with STMicroelectronics in December, we have really a momentum around the SmartSiC and a huge traction. I can tell you that many, many players in the silicon carbide world is calling us, it's working with us and it's quite encouraging and exciting. Now we are working out and we expect as soon as possible to give you 1 or 2 names additionally to our portfolio.

We'll move on to our next participant Jerome Ramel from BNB Paribas.

Maybe a more general question, Pierre. What do you think is going to be the main challenge for Soitec in the coming year, then for you as a CEO to run this company and to achieve the fiscal 2026 guidance and beyond. So after a little bit less than a year of the new CEO, what do you see is the new challenge or the main challenges that you see for Soitec going forward?

The challenge, that this company is growing very fast, okay, we are entering into stability for fiscal year '24. But under the stability, there are a lot of changes because we are up and down and offsetting of some decrease, and it's a lot of work under the stability. And beyond, we need to prepare a big rebound in H2 and also strong growth in '25, '26 and beyond. And of course, it's this hyper growth means that we need to be agile, flexible, we need to address new type of customers, logos by entering in SmartSiC. It's a new world of automotive by developing POI. It's also a new world by working on next future in GaN also it's opening new horizons. Then we need to keep flexibility and agility while structuring the company to be bigger and bigger than we are no more a midsized company. We are becoming a small big group. And it means that the management, the processes, the structures needs to accompany this growth and needs to make us strong in any products we are addressing, any customers we are addressing, but also in any regions where we need to extend. This is really what that takes. Then it's like turning on several engines at the same time while keeping a high growth and keeping the flexibility, agility, I would like to say, startup spirits of Soitec. At the end of the day, we might be 3,000, 4,000 in the coming years then it's, of course, quite small, but it's a doubling of the population. It's a lot of changes. It will be a doubling of our revenue to fiscal year '26 and of course, beyond, we expect to continue to grow rapidly because after all these products we delivered, you will see on the CMD that we have a lot of things in our car box that are making me extremely positive and confident for the long-term future.

And maybe a follow-up, you mentioned GaN opportunities. Could you update us on what kind of opportunity do you feature the infrastructure? Or do you see a potent in the handset as well.

Well, we see both. But what I proposed that during the CMV, we will be more accurate and precise in what we see and what the opportunities are on GaN.

We will move on to our next participant, Didier Scemama from Bank of America.

Didier Scemama from Bank of America. A question just on the POI business in future specifically. How long do you think it will take for this JV and all the efforts you've had over the last few years to bear fruits? Is that a fiscal year '24 event? Or is that further out?

Bernard being there until August, I would like him to answer this question.

So we continue to penetrate on the POI. So we will see first impact on fiscal year '24 and then moving forward. So here is -- again with SAWNICS is opening, a new thing because most of the filters the company are doing internally and to have some foundries proposing now, this is also an acceleration. It will help us to accelerate and to enlarge the customer base. But it will be step by step that we will see the growth.

Okay. And on SmartSiC, maybe going back to FX question earlier, don't mean to put undue pressure on you at least on a public call. But any sense as to the timing of the second customer, I believe, will be on a hybrid business model like STMicro or on the other part of the business, which people will buy just wafers from you guys. Any sort of timing you think around new customer announcements?

Well, as I said, we cannot give you precisely when we're going to disclose names of one or new customers to come. What we can tell you is that there is clearly a big traction and the momentum around SmartSiC and regarding the model, as we always said, we are open. But what we need to keep as the kind of basics as the foundation is that we are delivering SmartSiC wafers first, and then we can be open to any type of model. This is clearly -- if we want to -- and we want to become a standard. We want to make all the electrical vehicles with the SmartSiC in the coming decade, okay? Then if we have this ambition, we need to be quite open in the model, but the foundation of Soitec is to manufacture and to deliver wafers first. That will be -- I would like to say the first missions of any models we're going to engage with the next customers.

Obviously. And then maybe just one final question. Can you tell us on your fiscal year '26 revenue guidance? I'm talking about the SmartSiC portion of it. What's the implied sort of number of electrical vehicle you could support in terms of production. So is there any number you can share with us?

Yes. On fiscal -- we're going to enter more into details during the CMD, but we expect around 10% of our revenue by fiscal year '26 coming from SmartSiC business. And in terms of number of electric vehicles, well, we're going to talk about few millions at the beginning but what we expect at the end is, if you remember, our target for 2030 that remains the world, my, let's say, see, 45 million to 50 million of electric vehicles in 2030 that gives you a playground for the SiC world and business and we expect to take 30% market share of the SiC market with SmartSiC. This is our ambition. Then the trajectory of sales of electrical vehicles seems to be confirmed, if not uplift a bit. And we -- even if we have more electrical vehicle, we're going to keep this perspective and the ambition of 30% market share of SmartSiC within the SiC market.

Okay. And sorry, just one final question. Last night, ST signed a licensing agreement with Atomera for their MS technology. Is that complementary to what you do with ST or is it completely related to the best of your knowledge?

Well, really, no comment on that point. It's -- well, it's something that shouldn't have any specific impact for us.

We'll move on to our next participant, Adithya Metuku from Credit Suisse.

Maybe just on SAWNICS, I just wondered if you could give us some idea of who the major customers are in the filter space for SAWNICS and what sort of market share they've got, just to give us some idea of how material this sign-up of SAWNICS could be in the medium term? And secondly, on Atomera, I'm a bit surprised because I would have expected ST to move to Power-SOI for smart power devices, and they already used Power-SOI in some of their smart power products in the BCD products. So it seems to me like they're not entirely moving their portfolio to SOI substrates which I would have expected. And it feels like what Atomera is announcing is essentially increasing competition to SOI substrates. Would you agree with this characterization? And maybe more generally, how do you see Atomera as a competitive threat?

Well, Adi, thank you for the question. Then regarding your first question on SAWNICS, we don't disclose, as you can guess, any information to our -- from our partners and the best thing to do is to ask them their customers, their footprint and the way they operate. It's -- but what I can tell you and that you know already that it's a major player in the filtering foundries and you can guess that this company is hitting the best-in-class customers in this domain, but I'll let you ask them directly. Regarding the deal with Atomera with STMicroelectronics, again, we have no specific comments. And what I suggest is to ask STMicroelectronics people for specific questions. But what -- as we can -- what we see today is that there is no specific impact.

[Operator Instructions] We'll move on to our next participant, Olivia Honychurch from Jefferies.

I've got a couple, if that's okay. Firstly, on silicon carbide, SmartSiC. You just called out the 30% market share target that you've kept in place for 2030. I was just wondering if there's any upside to that target specifically if you're going to ramp up your capacity on SmartSiC more extensively than you're currently planning for, I guess, maybe through setting up a second facility. And then the second question is on 5G millimeter wave. You previously called that out as a growth driver. It does feel like rollouts there are going slower than expected globally, particularly in markets that were meant to see high growth like China and India. Have your expectations around 5G millimeter wave changed and I guess, what sort of level of adoption are you expecting in 2026?

Okay. Thank you for this question. And regarding SmartSiC, we will give more details on the market shares and the manufacturing capabilities for the future. But as you know, the assumptions we put in place to reach 30% market share of the SiC market with our SmartSiC solutions directly or indirectly is linked to clearly our investment and CapEx capabilities, especially the -- what is called capabilities we put in place in close to then it's in line and it's current with the capabilities. More to come that we will give you more details again during the CMD. Regarding 5G content, for the millimeter wave, we are keeping our assumption that millimeter wave will be around 15% of market shares within 5G smartphones. And this is the assumptions that seems to be more and more confirmed with countries that are going for these adoptions. There are some possible like millimeter wave, like technology maybe in China to come, that will be, of course, something to contemplate in the coming years. But keep in mind that millimeter wave is a part of the content expansion we are betting on. WiFi 6, 6e, 7 is also a very interesting features and applications that should be also a good drivers for extending our millimeter square footprint within the next generation of smartphones and again, more to be precisely disclosed during the Capital Market Day.

We will now take a follow-up question from Sebastien Sztabowicz from Kepler.

Yes. On the prices, can you help us understand how the prices are trending right now, both on your own product bulk wafer that you are buying from your suppliers. Any kind of indication there?

Then on the bulk, we are buying, as you know, we signed several long-term agreements and we have a quite stability in the prices, and we are, let's say, monitoring any inflation elements, thanks to this long-term agreement. That's the first key point. After difficult years for getting the right level of supplies, very recently, we have now something that give us visibility and solidity in the supply. Regarding the price for the wafers from our side, as you know, we -- there is a clear trend we are inducing to move from higher scale, higher size from 200 to 300 from 150 to 200, and that is providing, of course, better yield in terms of price impact. And we continue to invest big time in R&D. More than 11% of our revenue is spent in research and development to enrich and enable our road maps. Then we sell also more and more innovation, and we are versioning our products. Then it is helping us to resist to price erosions and better to sell sometimes features at a better price. And we don't see erosion in prices, thanks to our innovative spirit .

Thank you. It appears there is no further questions at this time, I'd like to turn the conference back to the host for any additional or closing remarks. Thank you.

Thank you to all. Then thank you for your interest and all these questions you've asked. As you know, the next date in our agenda will be the release of our fiscal year '23 results on the 7th of June after market close. And as already stated, we will hold a Capital Market Day on the 8th of June in Paris. We expect to see you numerous and this ends our call for today. Thank you very much. Bye-bye. Have a good day.

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