Besi Earnings: Impressive Gross Margin in an Industry Downturn; Recovery Should Arrive in Q4

Narrow-moat Besi BESI closed the second quarter with EUR 162.5 million in sales, down 24% year over year but up 21.8% sequentially as demand for the smartphone market begins to recover, a narrative we also heard from Soitec on July 24. Despite the sales decline, Besi closed the quarter with a gross margin of 65.6%, its highest ever, which we consider impressive for a company in a cyclical downturn but which does not surprise us. Besi runs a very flexible business model, with supply chain multisourcing, a flexible workforce, and premium pricing, which lead to gross margins. If this cycle behaves like previous semiconductor cycles, management expects the third quarter to be weaker than the second quarter given a seasonal pattern, and a strong rebound in the fourth quarter where they expect revenue above the first quarter. We are maintaining our EUR 82 fair value estimate and Exemplary Capital Allocation Rating. Soon, we expect to adjust our short- and medium-term top-line and bottom-line expectations.

In the earnings call, CEO Richard Blickman’s comments gave us further insight into Besi’s operations. Besi’s current hybrid bonding machines are operating at around 1,500 units per hour, although they will be able to reach 3,000 UPH in the future with new software and additional preparations. According to management, 1,500 UPH is still 3 times faster than competing solutions, which we believe shows Besi’s edge in hybrid bonding. Managers also said they are in constant conversations with their customers to help them bring assembly operations to a cleanroom environment, given the criticality of the change. Lastly, Blickman said the main reason for Besi’s gross margin leadership versus peers is its pricing, although good cost management is also important.