Soitec SA (SOI) Earnings Call Transcript & Summary

Hello, and welcome to the fiscal year 2024 First Quarter Revenue Conference Call. My name is Sharon, and I will 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, Mr. Pierre Barnabe, CEO, to begin today's conference. Thank you.

Hello, everyone, and welcome to Soitec's conference call dedicated to the publication of the revenue for the first quarter of fiscal year 2024. This is a quarter covering the period from early April to the end of June 2023. I'm Pierre Barnabe, Soitec's CEO. Together with me on this call are Lea Alzingre, our CFO; and Steve Babureck, our SVP Strategy. As usual, we will start with a few comments on our figures. And after that, we will open the floor to questions. After record Q4 '23, our Q1 '24 revenue was down 23% year-on-year, in line with our expectations. As we commented in our previous disclosures, we expect the ongoing inventory corrections across the entire smartphone market supply chain to impact our first 2 quarters of fiscal year '24. This inventory correction only affecting the performance of our RF-SOI product. More importantly, the impact of this inventory correction is temporary. The long-term growth trajectory in mobile communication remains intact. Besides we recorded a strong performance in our other 2 end markets, continuous sharp growth in automotive, industrial and smart devices. Looking ahead, Q1 is at bottom. We confirm we expect H1 to be down around 15% which implies a material improvement in Q2 with a sequential growth above 50%. And after that, we continue to expect a strong recovery in H2 as we confirm our guidance of stable revenue in fiscal year '24 versus fiscal year '23. So let me now outline our Q1 figures. Revenue reached EUR 157 million. This compares with EUR 203 million achieved in Q1 '23. As I said, it represents a 24% decline on an organic basis and a slightly positive currency impact of plus 1% year-on-year. Looking now in more details at our Q1 revenue by end market. Let me start with Mobile Communications, our largest division, which accounted for 57% of our revenue in Q1 '24. Revenue in Mobile Communication reached EUR 89 million. This represents a 43% decrease excluding currency impact against Q1 '23. As mentioned earlier, in the context of a global smartphone market slowdown, our RF-SOI product has been strongly impacted by the significant inventory clearing, which is still taking place across the entire smartphone valued supply chain. Therefore, the drop in revenue is essentially reflecting lower volumes. But more importantly, we expect RF-SOI activity to resume shortly. As for the sales of FD-SOI wafers that are used in front-end modules, the momentum remains positive. As we see ongoing adoption of our products across a diverse set of applications for 5G sub-6 gigahertz, 5G millimeter wave as well as applications beyond mobile such as satellite communications. POI wafers, which are dedicated to RF filters for 5G smartphones, delivered a significant contribution to our mobile communications revenue. We are now delivering POI wafers to several customers, and we continue to work on qualifying different design architectures with new customers. The revenue already achieved in Q1 '24 is a strong testimony of POIs added value. Overall, our efforts to develop new products for mobile applications such as FD-SOI and POI, are paying off despite a pause in the RF-SOI long-term successful story. To summarize, once this temporary inventory issue is cleared, we expect to resume our robust growth trajectory in Mobile Communications. Beyond Mobile, let's turn to our 2 other divisions, Automotive Industrial and Smart Devices. Automotive Industrial represented around 24% of our total revenue in Q1 '24. Revenue reached EUR 37 million. This is a sharp 57% revenue growth year-on-year, excluding currency impact. Growth was essentially driven by volumes, but also by some positive price mix effect. We continue to see growing demand for Automotive driven by the increase in semiconductor content in the new generation of vehicles, either ICE or EVs. We are taking care, we are taking here about -- we are talking here about substrates for applications related to infotainment to multipurpose gate drivers to autonomous driving and battery management systems with for all of them, functional safety as a key value. In terms of products, growth in Automotive and Industrial was supported by Power-SOI, which continued to deliver a strong level of growth. FD-SOI which also recorded higher sales than in Q1 '23, enabling more connected, more autonomous and safer cars. We also recorded further sales generated by our smart SiC technology, and we are on track with our road map. We continue to benefit from our cooperation agreement with STMicroelectronics and we are delivering smart SiC wafers to more than 20 players across all geographies. Overall, we are on time, on all aspects and the fab will soon be ready for first production in Q3 fiscal year '24. The ramp-up in production is still expected in fiscal year '25. Moving now to smart devices, which represented 20% of our total revenue in Q1 '24. Revenue from smart devices reached EUR 31 million. This represents a 10% organic growth compared to Q1 '23, mainly reflecting higher volumes. Demand remains supported by higher connectivity, embedded intelligence edge computing, cloud computing, more complex sensors and the need for lower energy consumption. This applies both to consumer products and industrial sectors. Sales of FD-SOI wafers were higher than in Q1 '23, supported by the need for edge AI applications. Sales of Imager-SOI and Photonics-SOI were lower than last year, impacted by a phasing effect. Photonics-SOI wafers remain a promising product to provide high speed connectivity solutions for artificial intelligence in the cloud and edge. Turning now to our fiscal year '24 outlook. As indicated earlier, we confirm we expect our fiscal year '24 revenue to be flat on a like-for-like basis with an anticipated 15% organic decline in H1 and a strong rebound in H2. The inventory corrections in the smartphone market, which is going to last another quarter, we continue to wait on our Mobile Communications business in Q2 '24. We, however, believe that RF-SOI sales bottomed out in Q1, which means we expect Q2 to be significantly better than Q1. We will also continue to benefit from the deployment of 5G infrastructure, the resilient sales of high-end smartphones as well as the improvement of 5G smartphone sales in China. On the 2 other divisions, we expect revenue growth in both Automotive and Industrial and Smart devices to remain strong. In addition, we also confirm expecting our fiscal year '24 EBITDA margin to remain at around 36%. Finally, as discussed during our Capital Market Day last month, we still aim at ambitious target by the end of fiscal year '26. This growth targets are supported by our strong portfolio, both from existing product FD-SOI, RF-SOI, Power-SOI and Photonics-SOI and new products, especially SmartSiC, POI and GaN which will serve our 3 end markets: Mobile Communication, Automotive and Industrial and Smart devices. This ends my opening remarks. Thank you for your attention. We are now ready to take your questions. Thank you.

Thank you, Mr. Barnabe. [Operator Instructions] We will now take our first question from Aleksander Peterc from Societe Generale.

I just have 2 to start with. For the first one would be on the handset market, and you touched on this in your opening remarks already Pierre. But we've seen the recent news flow that indicates that the expected recovery has slipped by around 6 months from starting in H2 '23 into end '23. We've had the negative comments on TSMC from ASML as well on the end market outlook. Now has your view changed on the handset market at all for the year in terms of all units and 5G units versus what you've presented to us at the Mobile World Congress in Barcelona earlier this year. And does this outlook change in any way your outlook for the year? Is it a little bit weaker as a result or no change and why? And then second question is really regarding the dynamic of first quarter versus second quarter. Now Q1, as you did indicate previously is weak at minus 23%, 24% year-on-year, but in the year ago quarter, you also had production disruptions. So the comp was a bit easier, which means that the underlying decline in the third quarter versus the normalized production rate from the year ago quarter would have been a lot worse and your second quarter guidance implied in the minus 15% for H1 is, if I'm not mistaken, around minus 9%, minus 10% around there. It's quite a lot better than the first quarter. And I'm just wondering what's driving this improvement in decline sequentially. Is it really an improvement already in your mobile businesses or other businesses reaccelerating, what's going on there?

Let's start with the handset market first, as you mentioned. Then we see -- as you see, this smartphone market in flattish minus zone, and this is what we were expecting, and it's in line with what we said during the Capital Market Day. But as we said, despite this weak signals, we see elements that are, let's say, keeping us confident in the deliveries of a flattish year for us for many reasons. The first reason is that the high-end market in the smartphone segment is quite strong and is resilient. People still continue to buy smartphone, high-end let's say, handsets. That's the first element. Second element, our contents continue to increase, and we are still expanding our RF-SOI, FD-SOI, POI footprint within many phones, models and again, high-end phones models. This is the second very important point. And the third point is that we see applications continuing to raising up and we see adoption of application that is sustaining these content expansions. And if you accumulate the 3 elements, it is helping us taking into account, of course, the 5G percentage and the penetration rate within the smartphone industry is still very high and on a good trajectory is keeping us confident in the, first of all, the recovery of Q2 and beyond, reaching a flat year fiscal year '24. Then this is the signals we have noticed and we disclosed to you during the Capital Markets Day are intact. And I would like to say even reinforced. And it's really very important to underline that. Second point on your Q2 rebound. Then clearly, we see a sequential above 50% growth between Q1 to Q2, then you did by yourself the math. It means plus minus 8%, minus 9% for Q2. Then this is really what we expect to be at minus 15%. This is, of course, sustained by clearly a rebound in RF-SOI for sure. to accompany this, let's say, growth sequentially, but also a continuity in growth in all the other segments. As you understand, except RF-SOI, all the other products across divisions are growing, okay? More or less, but they are growing. Some are growing very fast. That means that FD, POI, Power-SOI, all these products will continue to sustain into a company this sequential growth.

Next up, we have Francois Bouvignies from UBS.

I was just wondering on the 5G penetration, first of all, because Pierre, you mentioned content and high-end phone being sold. What's your 5G penetration for the year now and versus maybe 3 to 6 months ago, how is it evolving? It would be interesting to know. And the second one is I mean you mentioned as well FD-SOI and POI in the wireless market getting some traction and growing fast. Can you maybe tell us or give us an idea of how much of revenue it represents roughly? And how much is it growing today? And any big driver of POI, specifically customers or anything around that would be very helpful.

Okay. Then on your first question for 5G, as we said, we expect and we foresee a 60% penetration rate, maybe slightly above that percentage, but this is what we see. And quarter after quarter, this percentage is clearly confirmed. And of course, as you understood, it is sustaining, it is bearing our recovery trajectory and plan. That's for your first question.

And the millimeter wave, maybe if I can sneak a quick one on the millimeter wave.

In the millimeter wave, it's we expect, we see 15% penetration rate in that domain. That is also confirmed through the let's say, other models where announcement has been made to introduce millimeter wave. Then that means that the 15% is we see in some regions and countries, is clearly confirmed. And of course, all the applications going to pop up. We expect to WiFi. We expect 5G plus, we expect a different type of applications to really continue to entertain the RF-SOI development, but this is really in line with what we have already announced during the Capital Market Day. Regarding wireless business and beyond mobile, of course, it's quite limited, but it does exist and it's growing. I've mentioned that we made some sales for satellite communications application. This is add-on to the mainstream of mobile communication RF-SOI outcomes but this is something we see more and more the use of 5G, not only for mobile but for other wireless application overall. Regarding POI we are not disclosing, let's say, precise figures on POI. But you understood that we have several customers today that we are also in the prospections with additional customers. It's a sustained growth. We clearly see an adoption of our product and we clearly see that we are gaining market shares in the filters business overall.

Next up, we have Sebastian Sztabowicz from Kepler. Cheuvreux.

Could you please help us understand the level of inventories today at your main customer? Where are we standing right now? Are we almost back to normative level? And you seem confident that the inventory correction will be completed during Q2. What kind of visibility do you have there? That would be the first question. Second one is more on the margin side for H1 confirms for top line, minus 15% organic in H1. What should we expect in terms of EBITDA margin development for the first part of the year, if you can help us modeling a little bit?

Thank you, Sebastien. Then for your first question regarding inventory of within the overall supply chain. What I can tell you as a general comment is that it is clearly improving. The digestion is ongoing. There is no doubt. That said, it's really depending on product at customers, okay? So in some products with some customers, I can tell you we need to deliver, and we have appeal to even do more. In some other areas with some other customers, there are still a lot of inventory. And it's really an average, I can tell you an overall view, but what is clear is that there is an improvement. Step-by-step, these digestion is ongoing and we see a progressive week after week. That's for sure. Regarding our backlog, then we slightly improved our ratio of coverage. We are around 80% today compared to the Capital Markets Day. And step by step also, we are building this coverage than we are today, end of July. And the 80% is more or less in line with what we were observing in normal years, meaning in '18/'19 this is exactly this type of percentage we're observing to reach a year we are announcing to the market. Regarding the EBITDA H1 and full year, I would like perhaps Lea to take that point.

Yes, of course. We are not giving any guidance for H1 EBITDA margin. But for sure, this EBITDA margin will be affected by the level of the revenue despite the strong cost control measures we implemented. So yes, we expect a seasonality effect in the EBITDA margin.

We have Olivia Honychurch from Jefferies.

I have a couple, if that's okay. Firstly, on another question on POI. I know you can't give specific customer names, but broadly wondering if the strength you're currently seeing is mainly coming from China, which is what we're hearing elsewhere? Or is it more broad-based geographically? And on the SAWNICS partnership. What is the time frame on that ramp? I know you said in the announcement that it would be volume production starting in H2 '23. Is that still the case? And can we expect it to be quite a sharp ramp once that begins? And then I have a follow-up on SmartSiC but I might ask that after.

Okay. Olivia, thank you for your question. I will -- I hope I quote the second part of your question. But regarding POI, then we are setting really something new in the filtering world by having new type of architectures that are more open, more standard, that means that we are starting to get a success in this domain and we are serving any geographies that you mentioned China, yes. But there are other geographies where we are delivering our products. Then it is starting clearly to become a global success because the customers we have today are really have a global reach and a global coverage. Your second question was regarding a rebound on H2 smartphones, that's it.

No, the question was on the SAWNICS partnership, what the time frame of the ramp by that relationship would happen?

Well, it has started. Because when you are working with foundries and partners like SAWNICS, you need, of course, to enter into a qualification phase then we are preparing the ground to expand more and more the adoptions of our POI product within different platforms, mobile communication platforms. And having a partnership with SAWNICS that is a reference to this domain is reinforcing, of course, our level of qualification. It's also a way to get feedback on our architectures and to continue improving because, as you know, we're investing in innovation in all our products to have different versions and evolution, and this is really the nature of this partnership.

That's great. And just one more on SmartSiC, if that's okay. So I'm just wondering if you can give us an update on the engagements that you're seeing there. You said you're sending wafers out to 20 customers. Obviously, STMicro is the first to be officially confirmed. Can you give us an idea of how close you might be to finding a second customer? And separately, how many more customers you might need to fill your current capacity plans out to 2026.