During Q2-18, we experienced a sharp decline in orders for high end smart phone applications including a € 28 million order cancellation at quarter end from a single customer via its Asian subcontractors. This decline reflected both a digestion by customers of the substantial capacity added last year and in Q1-18 as well as a delay in the roll out of certain high end mobile features. Customer order patterns for assembly equipment can adjust quickly depending on economic conditions, capacity utilization rates and the timing and success of new product introductions, particularly for mobile applications.

Fluctuations in high-end smart phone orders overshadowed positive trends in H1-18 in some of Besi’s other end user applications such as automotive, computing and spares/service. They also overshadowed notable orders from Chinese subcontractors for mainstream electronics applications during Q2-18. Further, they obscured the significant opportunities ahead to leverage Besi’s technology for the demands of the new digital society such as AI, 5G connectivity, expanded data, computing and memory needs, block chain software deployment, increased automotive electronic content and the Internet of Things. As these needs are realized, the assembly equipment market will become an ever more critical step in the semiconductor value chain for which we believe Besi has the premier advanced packaging portfolio and market position.

Looking to Q3-18, we estimate that revenue will decline by 25-30% sequentially due to unfavorable conditions in the high end mobile market, typical second half seasonal patterns and weakness in the high performance computing area from Chinese and Taiwanese subcontractors. As a result, we started adjusting temporary production levels in Q2-18. In parallel, strategic plan execution continues apace to further reduce European personnel and other structural costs and enhance future profitability. 

We are initiating a new € 75 million share repurchase program through October 26, 2019. The new program will replace our current 2.0 million share program, under which approximately 1.5 million shares have been repurchased to date. It is intended for capital reduction purposes and to help offset dilution related to our Convertible Notes and share issuance under employee stock plans.”   

Second Quarter Results of Operations

Besi’s Q2-18 revenue increased by 4.0% vs. Q1-18 primarily due to higher system shipments for mobile and automotive applications. Revenue decreased by 5.2% on a year over year basis reflecting lower die bonding shipments to Asian subcontractors for mobile applications partially offset by increased shipments for automotive and computing markets.   

Orders of € 86.3 million were down 58.1% vs. Q1-18 primarily due to reduced demand by Asian subcontractors for high end smart phone applications after the significant Q1-18 capacity build. In addition, the decrease included the cancellation by a single customer via its Asian subcontractors of € 28 million in orders at the end of Q2-18. Similarly, orders decreased by 33.7% as compared to Q2-17. Per customer type, IDM orders decreased sequentially by € 40.3 million, or 36.3%, while subcontractor orders decreased by € 79.2 million, or 83.6%. IDM and subcontractor orders represented 82% and 18%, respectively, of total Q2-18 bookings.

Besi’s gross margin of 56.5% in Q2-18 was equal to Q1-18 and at the high end of prior guidance (55-57%) despite adverse forex influences from the increase in the Malaysian ringgit vs. the euro. Gross margin decreased by 0.8 points vs. Q2-17 principally due to the significant decrease of the USD vs. the euro and, to a lesser extent, higher severance charges.

Q2-18 operating expenses decreased by € 7.3 million, or 18.7%, vs. Q1-18 and were better than prior guidance (-5-10%). The sequential decline was due to a € 5.9 million reduction in share based compensation expense and € 1.7 million of lower warranty costs. Operating expenses decreased by € 2.3 million, or 6.7%, vs. Q2-17 due primarily to lower warranty costs and higher R&D capitalization on new product development partially offset by higher Asian personnel costs from increased headcount levels in that region. Total headcount at June 30, 2018 decreased by 1.9% vs. March 31, 2018 due to a reduction in temporary production personnel.