BE Semiconductor Industries

Good morning, good afternoon, ladies and gentlemen. Welcome to Bessie's quarterly conference call and audio webcast to discuss the company's 2022 third quarter results. You can log into the audio webcast via Bessie's website, www.bessie.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer, and Mr. Leon Favain, Senior Vice President of Finance. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. The instruction will follow at that time. As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company. I would now like to turn the call over to Mr. Richard Blickman. Thank you.

Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then take your questions. I would like to remind you that some of the comments made during this call and some of the answers in response to your questions by management may contain forward-looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM. For today's call, we'd like to review the key highlights for our third quarter and nine months ended September 30, and also update you on the market, our strategy, and the outlook. First, some overall thoughts on the third quarter. Basie reported Q3 22 results, which were at the favorable end of guidance, but reflected the impact of a new industry downturn. For the quarter, revenue, orders, and net income of 168.8 million euros, 125.3 million euros, and 57.3 million euros decreased by 21.1%, 18.2%, and 24.2% respectively versus the second quarter of this year. Adverse revenue and order developments this quarter reflected typical seasonal weakness for mobile applications, but also more general weakness in high-end server, data center, and general computing applications. Such weakness was partially offset by continued strength in automotive and industrial end-user markets and ongoing shipments, of hybrid bonding equipment to customers. Similarly, Basie's backlog of 240.6 million euros at the end of Q3 declined by 12.6% versus Q2 22, but remained at higher than typical levels. Despite the challenging market environment, we maintain profit efficiency at high levels with gross margins of 62.3%, exceeding guidance and a net margin of 34%. We realigned Basie's production model rapidly in response to changing market conditions. As a result, total headcount has declined by 12.7% and temporary Asian production headcount by 65.2% since the end of the first quarter of this year. We will continue to adjust overhead levels as necessary in accordance with market developments. For the first nine months, Basie reported revenue of €585.1 million, which increased by 1.3%, and net income, which decreased by 6.9%, versus the comparable period of last year, 2021. Growth was favorably influenced by increased demand for Basie's computing, automotive, and hybrid bonding end-user markets. Such strength was partially offset by reduced demand for high-end smartphones following a large capacity build in 2021. It also reflected a 37.6% revenue decrease from Chinese customers, primarily associated with overcapacity, slower economic growth, and COVID-19-related lockdowns. Orders of €483.3 million decreased significantly by 34.4% as industry conditions materially weakened post the significant assembly capacity built over the past two years. The 14.8 million euros decrease in basis net income between the comparable periods principally resulted from a 49% increase in development spending as we increased investment in future areas of growth for the next market upcycle. Our liquidity position continues to build with strong cash flow generation of 185.2 million euros during the first nine months of this year, which supports Basie's capital allocation policy. We ended the quarter with cash and net deposits of 661.8 million euros and a net cash of 342.5 million euros. that represented increases of 12.1% and 19% respectively versus September 30 last year. Liquidity has improved this year despite the distribution of €351.3 million to shareholders in the form of dividends and share repurchases. We completed our prior €185 million share repurchase program in July and began purchases on our new 300 million euros program in August. During the quarter, we repurchased a total of 0.9 million shares for an aggregate amount of 45.5 million euros. Next, I'd like to speak a little bit about the current market environment in our strategy. As seen in the next chart, A industry downturn began in the second quarter after a long capacity upcycle. Industry conditions deteriorated significantly during the third quarter, highlighted by slowing memory, mainstream computing and data center markets. Continued weakness in Chinese markets and CapEx reductions announced by many of the largest semiconductor producers. The only market which has enjoyed positive growth this year is automotive. The outlook for the assembly equipment market also turned more negative this quarter as industry conditions weakened, global GDP growth rates decelerated, and customer caution increased. At present, it appears to be a traditional industry downturn marked by overcapacity and order push-outs by customers. Down cycles are typically the periods in which BASIC looks to improve its business model and plans investment in those products and technologies which will drive revenue growth in the next up cycle. The announcement of new restrictions recently by the US on sales of front ends and assembly equipment to China has added more uncertainty to the industry outlook. We are currently restrictions the imposed language to better understand whether any of basis below 10 micron accuracy systems could be subject to such provisions. Strategically, we are accelerating investment in Basie's future despite near-term headwinds, particularly for our hybrid bonding and wafer-level assembly portfolio. As the long-term drivers of our business remain intact and sub-10 nanometer device innovation continues to pace, In fact, R&D spending has increased almost 50% this year, highlighting our enthusiasm for Bayes' future growth opportunities. We see continued interest in hybrid bonding applications as the natural extension of Moore's law to drive technology gains in new heterogeneous 3D architectures for next generation logic, memory, mobile, automotive, and data center applications. Of note, AMD announced last year in the third quarter its first hybrid bonding chiplet, which was the starting point for the further adoption of hybrid bonding in the past 12 months. BASIC received orders subsequent to quarter end for an incremental hybrid bonding capacity and for systems incorporated in hybrid bonding integrated lines. Additional orders are anticipated in the fourth quarter. Now a few words about Q4 guidance. For the fourth quarter, we estimate that revenue will decrease between 15% and 25% versus the third quarter, reflecting current market conditions and seasonal trends. However, basis gross margin is expected to remain in the 60% to 62% range due to the flexibility of our production model and anticipated product mix. Further operating expenses are anticipated to increase by approximately 5% versus the third quarter principally due to higher R&D spending. The midpoint of Q4 guidance implies full-year revenue of approximately €720 million, down approximately 4% versus 2021, and a gross margin of approximately 61%, up 1.4%. That ends my prepared remarks. I would like to open the call for some questions. Operator.

If you'd like to ask a question on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. The first question comes from the line of Didier Semama of Bank of America. Please go ahead.

Oh, thank you very much. Good afternoon, everyone. Richard, I've got first a question on hybrid bonding. Could you give us a sense of how many orders you booked in Q3 and how many orders could come in Q4? And in general, just give us a sense of where we are in terms of, you know, TSMC making progress on yields, on the alignment and the cluster tool, just the general enthusiasm there. from your customers on hybrid bonding, and I've got a follow-up. Thank you.

Well, excellent. Quarter after quarter, we continue to see increased adoption in the industry more broadly. So, of course, the card is drawn by Taiwan, in that matter, Also in the US, it's gaining traction. We have in a year's time shipped over 20 machines, of which the major part is in full production. So the adoption rate of architecture using hybrid bonding and also the first chiplets are developing according to a roadmap which we understood about three years ago, is simply intact. So Taiwan being the first mover, the U.S. following thereafter, in the first stage, standalone equipment, and then also the cluster tool, the integrated line, simply intact. following a concept whereby ultra-clean processing will be ever more critical when we move further down the design geometry roadmaps. We are now in the 150-200 nanometer accuracy range, which will move down early next year as a start with 100 nanometers accuracy requirements This supposedly is following the design rules for front end from seven nanometers today down to five. And then three to five years down the road, we have to move down to 50 nanometers. This whole roadmap technology, but also adoption, as said earlier, follows a roadmap timeline, which... is simply to expectation. Some can also claim that it is accelerating, but if you follow closely our guidance over time, also the analyst day presentations June last year, June this year, the best way to summarize it is that it's on track. How many machines in total will be required in certain timeframes. We have simply interpreted the demand by the end customers indicated. It should come close to 50 machines in a first round. So more orders are to be expected, as we mentioned in Q4. which have been indicated. Then we have next year, the start in the initial phase in the US, preparing for production volume in 24. That may also, let's say, account for about 50 machines, simply based on numbers of devices produced. the major ramp is more and more, let's say, guided for 24, 25. There are some numbers indicated in Taiwan, for instance, but also in conferences where the full adoption of hybrid bonding and especially the chiplet architecture by that time will require significant more machines. BASI is preparing for that in several ways. Number one, our R&D, which we also mentioned in this call, which is increased simply by the ever-increasing applications of using hybrid bonding technology. At the same time, our infrastructure, our supply chain to build those machines, we are gaining everyday experience in in supporting machines operating in full production environment. So step by step, say day by day, we are gaining experience and the adoption is continuing as expected.

Very interesting. Very useful actually, Richard. So on the order intake, if we look at the shorter term environment, on the order intake for Q4, normal seasonality obviously is down. Would you say that the normal seasonality for Q1, which is a major order intake, would be reasonable given what we missed effectively last year, that a big customer that did not place orders, given that perhaps You've reached perhaps sort of a bottom of orders in Q4 and also taking into account what you just mentioned on the orders that may come in for hybrid bonding. Is that the right way to think about it?

Well, we all know that in current times, there are more uncertainties than just mentioning China, for instance. We are faced globally with significant inflation that could dampen the demand for semiconductors in many ways. But if that uncertainty is sort of caveat for statistically, There's, of course, always the first half of the year is stronger than the second half. That has been, let's say, a rule of thumb for many, many years. So you should then see orders come in in Q4, Q1, simply organizing the demand and then the delivery into Q2, Q3, those are the typical patterns. How this year and the beginning of next year will evolve, the only thing I can say so far in October, things continued positively. But we also said the downturn started, let's say, Q1, Q2. So we are three, four quarters into the downturn. Typically it lasts six quarters to eight quarters, depending upon outside factors. So the summary is a bit, the message to convey is a bit more uncertain than it was, for instance, at the end of 19 and then early 20s. but then all of a sudden COVID hit the world. So anyway, for us, what's important is also order levels. If you simply imagine 200 million Q4 last year, Q1, then dropping down to 154, now to 125. Revenue, we guided down 15 to 25% versus what we achieved in Q3. So that would mean somewhere 140 or 135 or whatever. But those are still very much higher levels than what we had in the previous cycle. And then with the strong margins, supported, of course, a bit by a strong U.S. dollar, but that bodes well in a semiconductor, yeah, typical downturn, and then with the positive traction of new technology. So that's in a bit longer answer, DDA, how we look upon what may unfold in the next two quarters. Needless to say that we are ready to ramp rapidly in case that demand is required. But also, as we mentioned, if the world turns further south, we have many ways to adjust our model to more difficult times.

Thank you so much. One final question for me. You did mention on your press release this morning that some of your tools might be subject to the export controls. So apparently, the rules apply to tools that have 10 micron accuracy and below, which is a large portion of your shipments. And China, obviously, is an important geography for you. So can you perhaps give us a sense of how much of your revenues would be at risk, at least as per your understanding of those rules? Thank you.

Well, as we currently understand that, that's less than 5%. Thank you. Very simple answer. So the traction for the below 14 nanometers is for us certainly not out of China. So that risk is limited. The only thing which from our point of view we'd like to share is it definitely will have an impact on the entire state of the industry. One could argue there will be production moving out of China to surrounding countries, maybe also on-shoring in certain cases. That also is a positive thing because more equipment will be needed. But overall, it may have an impact of slower growth for the industries. The verdict is out. It's always exciting. We've gone through many of these situations in the world. If we go back to Japan in the late 80s, the start of Korea, early 90s, all the other crises, the internet bubble, the banking crisis, But the key is to understand these are always unique opportunities to build a better company.

The next question comes from the line of Francois Xavier Bouvini of UBS. Please go ahead.

Hi, thank you very much. I have two quick questions, mainly follow-up to Didier's questions. On the hybrid bonding, I'm not sure I followed your comment, Richard. I'm sorry, but how many shipments do you expect for 2023? I mean, I heard like 50, but you were talking about a U.S. customer only. So I'm just trying to I better understand your answer. How many shipments do you expect for 2023 hybrid bonding? And how many orders do you have today total in your backlog? Just to clarify this, my first question, if it's possible.

Well, let's say the 50, as I mentioned, is an initial capacity indicated to offer this technology and mainstream production for high-end computing. So that's the start, high-end logic devices and connected with that certain chip. But then a wildcard is of course the application in high-end smartphones. And that could lead to significant more capacity required. So the 50 as a number is what is required both in Taiwan and also in the US. What the number precisely will be in the end is difficult to forecast because they're not precise numbers. It depends, first of all, on the continued adoption of hybrid bonding as the next mainstream technology. But number two, as I mentioned, on which applications it will be used. And for 2023 is still a year of early adoption. The big volumes are expected in 2024, 2025 and 2026. Taiwan was very explicit about the demand they would expect in 2026, which then is an enormous tenfold increase over the initial phase. So that's many machines. But that's also still a few years away. How much we have precisely today, in backup, we don't disclose. We don't do that for other machines. But as I mentioned, so far we've installed not only Taiwan, but also in other places, close to 30 machines already this year. So it's moving in that direction.

That's very clear. Thank you. It clarifies it, actually. So the second question is... Again, it's on the China restrictions. So direct impact, from what I understand, is less than 5%. What about the indirect impact? I mean, for example, let's say YMTC is not able, I mean, it's not like maybe a lot of below 10 micron, or if some Chinese can't operate because of these restrictions, Did you try to quantify how much it can impact your revenues in total, so direct and indirect as such? I know it's very challenging, but I thought I would try.

Well, it's a very good question, and that's why I made the remark that it's too early to tell precisely because only tomorrow or the day after, I don't know which day precisely these revenues new restrictions will become into effect. But as I also mentioned, the effect of those restrictions on the industry is hard to tell. But if we look back in historical perspective, and I mentioned in the past 30 years other moments in time, that always has had a negative impact on the industry as a whole. So, A direct impact less than 5%, so that's very small. But what would happen to the entire industry? We hope, of course, that it is similar to a COVID impact, where first the initial thought was it would be very negative for the industry, but immediately it turned into many opportunities in growth in other areas. And I also mentioned that you see, for instance, the slowdown in orders from Chinese subcontractors is not only because of Chinese economy and COVID, but that also has to do with capacities which are being organized elsewhere. We have mentioned this in previous calls, but this is, of course, accelerating with the measures that which are becoming more and more restrictive in terms of growth in China. And that will have a positive impact outside of China.

That's very clear. Thank you very much.

The next question comes from Robert Sanders of Deutsche Bank. Please go ahead.

Yeah, hi, good afternoon. I have a question on the smartphone application processor opportunity for hybrid bonding. So my question is basically, TSMC is obviously developing a lot of capability in this area, and I suspect they're working with a lead customer, like, for example, Apple. But, you know, is the kind of expertise and intellectual property mainly with TSMC as opposed to with Apple? Because obviously, from a basic point of view, you want as many smartphone application processors to use this technology. So is there any kind of barrier from, you know, MediaTek or other companies using hybrid bonding quickly, or is there some kind of learning that they need to do before they ramp, you know, in 2024 or later? Thanks.

That's a very interesting question we are also discussing among ourselves. It's hard to tell whether there will be any restrictions in terms of IP ownership. So far, we have not come across that yet. But it could well be. You don't know who owns that. Is that the TSMC or is that the high-end smartphone manufacturer, the designer? Well, there's some literature in the past month about that, which tends to point that towards the high-end smartphone, let's say, leader in the world. But how that will, in the end, restrict that adoption to others, probably it will be licensed. That could also be a solution. which has been done in the past and is still done in many instances.

Okay, and as things stand, the TSMC 10 times the initial phase, it sounds like the huge majority of that capacity expansion is for smartphone application processor. Is that right? I mean, in a broad brush, more than three quarters. Okay, thank you. That's it for my question. Thanks.

Thanks. The next question comes from Ruben Devos of Kepler Chevroo. Please go ahead.

Yes, good afternoon. I just had a question on the front end. Basically, we've been seeing some conflicting updates lately in the industry. In particular, it looks so far that the front end equipment suppliers are somewhat less impacted by a deteriorating macroenvironment. whereas the back end, such as yourself, is more feeling the pinch, let's say. I was curious whether you could help us understand what could potentially explain this difference and why this time it may or may not be different from a previous down cycle.

Well, we've said in the previous call, and thanks for this question, this is a very positive, let's say, phenomena. If you would have a significant front-end downturn, you would probably have also a longer back-end, let's say, capacity adjustment. So what typically happens is, and you can see that statistically over many, many years, back-end is simply more shorter time adjustable in terms of capacity than Fontaine. Fontaine fabs take much longer time to build, to qualify, etc. So the roadmap for the next three years for Fontaine remains significantly strong simply because of underlying technology changes in our society and in the whole world. Backend clearly follows more closely capacity and also new technologies. And as we try to explain, there is in certain areas, simply because of enormous growth in 2021, an overcapacity which will be absorbed, and you have new technologies which are continuing adoption and simply following the roadmaps for a next generation technology and all the derivatives from that. So we have been trying to share since February already that we have seen a peak after eight quarters of growth, end of 21. And we've seen gradually Q1 was still very strong, but Q2 clearly evidence by orders and and q3 even more um that that we are following a typical downturn pattern for demand of of assembly equipment all right that's very helpful um and then maybe to follow up on on the r d uh spent i think the press release we've also seen that these were somewhat higher this quarter and also for the for next quarter will be higher

Obviously, a lot of innovation and progress in chip performance will now come from advanced packaging. I think if you look at consensus overall, for the next few years, it looks like they expected to trend down R&D spend relative to sales towards 6%. I believe peers are averaging about 10% of sales. So my question is, is that a valid assumption that the market is taking or not? Or how do you think about your R&D spend now that advanced packaging is gaining more attention in the semiconductor space?

Well, two comments. Number one, and this has been, let's say, a characteristic for many years, our R&D spend is very focused on customers. It's all driven by clear customer programs. So very focused, which is also the key to our business strategy. Over time, that translates into relatively lower percentage of sales compared to comparable competitors. On the other hand, it has doubled like our revenue. in the past five years. And we have simply told the world also in the analyst day that that will continue to increase. Simply moving the accuracy down from 150, 200 nanometers to 100 and then down to 50. But then also the development roadmaps for all of our other 18 different platforms it becomes ever more complicated. Accuracies, more complicated devices, thinner packages, and that's an ongoing development effort, which is wonderful. And if you do that focused, on average, it should remain below 10%. Maybe in downturns it can be sometimes above 10%, but that is that is simply sharing our philosophy. So it's not driven by percentage of revenue, but it's very clearly driven by customer programs. And the engagements with Taiwan, with the US, with Korea, those customers demand an enormous R&D engagement. And the consequence of that is to continue to be selective in what we do and what we do not do. And what we do is clearly mainstream focused, to be a bit more precise on that, and not to be, let's say, diverted into unique special solutions. It's all mainstream. Mainstream and product application driven. All right. Thank you very much, Richard.

The next question comes from Mark Hesseling of ING. Please go ahead.

Yes, thank you. My first question is, again, on hybrid bonding. I'm looking at what you shared at the Capital Markets Day, saying that now that the machines are in the field, that you expected a quite rapid improvement in the performance from 1,000 units per hour to the 2,000 before the year end. How do you see that? Is that the trend? Is that technology progression going as planned? And also related to that, where do you currently see the competition?

That's also good. Well, as I tried to explain earlier, we're making significant progress every single day. That's also why we receive repeat orders. Exactly. Each number depends also on the device size. There are certain devices where we do reach the 1,500 and also where we are already at 2,000. But that's not the key criteria at this moment. The key criteria is yield at those throughputs and reaching levels above 80%. And to get there is a long, long journey. We started with this around seven years ago. And we're getting better at it continuously. About competition, we mentioned also earlier that competition, clearly Japanese, was at the very beginning. company which has also a wonderful system but not with the throughput we've been told what we can accomplish and with the adoption increase also others are telling the world they want to enter into the hybrid bonding technology space so some have announced that next year they will introduce a hybrid bomber in a similar accuracy level which we can achieve today as prototypes. But that only confirms that hybrid bombing is becoming a major mainstream technology for the years to come. So there is definitely activity on the competition. I should also mention Korea. which typically wants to have also some independence. So compared to a year ago, when there was still doubt on whether hybrid bonding would establish as a mainstream connect technology, that doubt is gone one year later. And that also then convinces others to focus on the opportunities in this emerging market.

Okay, clear. I believe already that it's not going to stop at the current productivity. It can continue. What does it then eventually will do for your ASPs? Is it logically that you trend up with the improved performance?

Well, it trends up with higher complexity and with more throughput, cost of ownership. You're always in this industry forever. the measure is cost of ownership because in a simple way, the customer needs to produce an X number of devices. And the key is how many topics does he need to, to achieve that? So in other words, how many bombers does he need to get that for you? And, and that is, that is how you sell the, um, yeah, the value of, of any product. Um, So if we look at this hybrid universe, clearly, yeah, the 150 is already a major achievement compared to the one micron, well, even three micron, which is for flip chip in the current mainstream. That's a major, major step and a much more expensive machine. And going down that curve to 100, will increase only the cost already and even more so going down to 50 nanometers. So the trend will be higher ESP in any case because of complexity. And when we manage to continue to increase the output of these platforms over time, offering a better cost of ownership that also can increase the price of these machines.

Yeah, and then the final question I had was on the sort of clients pick either like a standalone machine or a clustered integrated machine in an integrated cluster. What is the trade-off that they have to make? Why do they pick one and why do they pick the other? And is there differences in what kind of applications you're going to use it for?

Well, In the most simple way to look at this, the biggest enemy of a hybrid bond, a bond, because it's copper to copper, it has to be ultra clean, no particles. Any particle will simply cause that the bond will not be established. So ultra clean is the name of the game. If you move any part from one machine to the next, you run the risk that you, in whatever way, create particles. So to integrate these processes in one tool, and that's the whole concept, then, per definition, you can reach the highest level of cleanliness. So zero particles. But it's not as easy as it It sounds because connecting these machines into a tool is already a major step. And we've come since the early beginning, early last year. The first machines, one is being shipped to Taiwan, the other in the US. And that will be a development program for at least another 12 months. But ultimately, the vision is that the industry will use this technology in a clustered format. Standalone is the way to get there because then you can optimize every individual process, optimize the technology moving into smaller geometries. So we expect side by side for the next many years that you will see this development you see on the one hand, standalone tools, and then for more mainstream adopted cluster tool solutions.

Okay, very clear. Thanks.

The next question comes from Martin Marandon of OdoBHF. Please go ahead.

Hi, thank you for taking my question. My first question is on hybrid bonding. Considering the profit warning that we saw recently from CPU players and the slowdown of the server and the PC market, does that change in any way the runtime of hybrid bonding in the short term, meaning maybe a bit more back-end loaded than we expected? And I have a follow-up.

Well, How this typically, let's say, is established in this world. Today's volume, mainstream, is based on technology of the last three to five years. Because that is how it develops. And the hybrid bonding is for the next technology and today. in a very early and in some customers still in infancy phase. So it does not impact the technology progress. This has more an impact on today's tools used in those applications. And we see that, as we mentioned, the slowdown. in the press release, but also in the comments, there is a certain centralization, or you can say an overcapacity, and that has to be absorbed, and new technology will be leading the way to a next generation.

Okay, very clear, thank you. And maybe a question on overcapacity, since you mentioned it, On the risk of overcapacity lasting longer than expected, you are already experiencing some inventory digestion at the moment as the market is slowing down, but how do you assess the risk of overcapacity in the industry with all the fabs which will come live in 2024, 2025, and the CapExplains program ongoing, driven notably by sovereignty issues?

Well, to give you a very direct answer, This is a recipe for overcapacity by definition. And I hope that in investor calls in 24, 25, this will be a moderate overcapacity. But we have seen this in the past. In the late 80s, when Japan became too strong, there was a similar slowdown forced onto Japan. And then Korea started with massive support of the whole world and the U.S. in particular, which led to an overcapacity in the second half of the 90s with the Korea crisis. So per definition, any factory is a capacity and is based on a model which is always an an overcapacity but then how much that will be also depends on what's happening in further digitalization in artificial intelligence if you look at all the business models which should change society for the better which requires an enormous growing amount of semiconductors in the next generation technology there are many who forecast that will be another period of enormous expansion.

Thank you very much.

The next question comes from Charles Shee of Needham and Company. Please go ahead.

Hey, good evening, Richard. Thank you for giving me a chance to ask a couple of questions. So Richard, I think how your business has been trending this year in 2022, almost exactly follow the same script for 2018, meaning like in Q3, you got a big decline and in Q4, your decline kind of narrows and, uh, If the same trend follows, looks like a Q1, it may down a little bit in terms of your quarterly revenue, but it seems like that's when you could reach a bottom in terms of a quarterly revenue, then there's probably going to recover from there. But I want to ask you about how you think about 23 in terms of the year-on-year decline. Looks like... if you're following the same script into 2030, your revenue may decline by double digit next year. In 2019, you were down like 30% something on the top line. So my question is, as you look at the industry cycle, this new down cycle into next year, How should we think about are you going to fare better or fare worse than 2019? Or what would be the reasons for you to doing better or for doing worse next year compared to 2019, relatively speaking, in terms of the year-on-year growth? I hope my question is clear.

Crystal clear. Let's say the better... 23 compared to 19 depends on the further adoption of hybrid bonding, what we discussed earlier in this call. We had zero hybrid bonding in 2019. Number two is the next smartphone cycle with, let's say, major major new elements, features. Those two will impact in a positive sense at 23, because in 19 we did not have a smartphone cycle. We had the iPhone X in 17, which then was overexcited in 18, which caused the enormous correction for us then and that is different this time because 2022 is not an iPhone or let's say a high-end smartphone year in that sense so that's different the key is of course but all of us don't know if you look at the economic environment We had no interest rate at that time. We had no inflation. We had no Korean War. We had some debates with China, but not to the extent we have right now. So as I tried to explain earlier, we have also major risks, but also major opportunities. So that's, Charles, how we see the world. I could also add to that because that's also important. We have a much broader customer base compared to 2019. We already see that in the order levels. We have better margins. Our cost structure has improved significantly. So there are many positive things for 2023.

Got it. Thanks. Maybe the next question. I think, Richard, you mentioned about in the downturn, what you want to do. One is developing new products, technology. I mean, that's a given. The other thing you mentioned, but I don't think you elaborated much, is this business model improvement. What exactly do you mean with that? And can you Tell us what are the specific actions you're trying to do or you maybe have been doing in the down cycle and how should we think about that going to impact the next up cycle to your business? Thank you.

Well, that's also an excellent point. COVID has forced us to be much more directly connected engaged in our supply chain. Simply because there were major issues every single day, but also because of that, we had to further expand our supplier base, qualified different suppliers, different components. So the focus on our supply chain has increased significantly. And that We already see some impact of that in a positive sense in this quarter, but also in 2022. So our operating model, which is very much using a multiple supplier strategy that has further expanded, so we have a tighter grip on the supply chain. that creates cost improvements on an ongoing basis, but also flexibility. So those are key targets. And we simply repeat each time, we're far from perfect. The way we build machines is, let's say, compared to other industries which are far more tight. like the automotive industry. We also engage with people who are experts in those industries to teach us how we can better manage our total operating model. So we use downturns typically to improve our operating model in every sense. And that's a never-ending challenge. in a similar way to product development.

Got it. Maybe allow me to squeeze in my final question on Q4. So Richard, I think last year in Q4, Q4 2021, I mean, you did get some initial orders on high-end smartphone applications. And do you see something similar this time? That's one. The other is, of the RPEX increase in Q4. I know you have started amortizing your capitalized R&D for hybrid bonding as you are recognizing revenue, shipping new tools. How much of that 5% RPEX increase is really coming from increased amortization of the hybrid bonding R&D that has been capitalized in the past? Or how much of that is actually new incremental organic R&D development activities? Thank you.

About 50-50.

Okay, sorry. What about the other question about high-end smartphones?

Okay. Well, if we would know, we would be able to guide that. But that will be a very critical question to understand. Um, and, and by the end of February, we will all know much more how, how this first half 23 will, will develop and whether there will be a real cycle in that sense, um, supporting, um, um, yeah, growth in, in 23. So, um, We did mention already we had some long lead item orders in Q2 already for next year to be safe on a ramp potentially. But as always, there are no guarantees. All right. Thank you.

Thanks. Sorry, carry on.

Any further questions? Sorry to interrupt.

We have two more questions. The next question comes from Tim Schultz in Melanda of Redburn. Please go ahead.

Hi there, Richard. Thank you for taking the question. I just had three very quick ones, if I may. First, just on hybrid bonding, just wanted to check some of my maths. Year-to-date, a high double-digit euro contribution to revenues. Is that the right kind of ballpark?

Yes.

Perfect. In the non-hybrid bonding part of the business, could you just maybe talk a little bit about pricing discussions and pricing dynamics given the changing backdrop and then add a follow-up? Thank you.

Well, in... In response to an earlier question, the key in selling this type of equipment is a constant improvement of cost of ownership to customers. And that simply means that there's pricing pressure is always in any business engagement. There's always a discussion about price. But in offering improved cost of ownership versus previous generations, versus competitive choices and results, as you can see in margins, which are at current levels, it also makes no sense in softer periods to try to sell more machines at a lower price. Because that's not the differentiator. And certainly... at the end where we sell our equipment, that's definitely not the place where we want to be. So in general, yeah, because of inflation, we have a hard challenge, which is a very good one, by the way, to convince our customers that costs have gone up. We've done that this year twice already. last year because of all kinds of logistics costs and COVID related costs. So on the one hand, we are able to increase our prices once we can explain the reasoning. But that's the situation where I think capital goods industry is always in. Right.

That's helpful. Thank you. And then just on the roadmap, you've talked about accuracy. I think we've sort of touched on just very briefly throughput. Could you just share what commitments you've made to your customers about throughput, about accuracy improvement? You've mentioned sort of 50 nanometer and 100 nanometers. So just maybe whether any of that is contractual, are there any damages or penalties other than obviously missed sales for missing that roadmap? That would be my last question. Thank you.

It's missing roadmaps. It's fair to say that with all these programs over many years, there are always setbacks. Setbacks because of ourselves not being able to get that right immediately. There are also other impacts. We are, in this whole production process, we are a certain element. So there's an impact pre our involvement and there are impacts in materials. So this is complicated environment, which is dependent on many factors. It's not what you mentioned as the first. It's not contractual with dates which are cut off and penalties. These are development roadmap programs where everyone is aware that there are definitely areas still to be proven. It's the design of concepts. and many, let's say, unforeseen in a way, unexpected. But that's our world, and that's what we like, and that's what our customers are used to. And there are many customers who are excellent in setting the pressure to... yeah, accomplish what we need to accomplish in the shortest period of time with every help. Because it's very interesting. Very clear.

Thank you.

The last question comes from the line of Ricardo Romeat here of One Investments. Please go ahead.

Hi, actually, it's Peter Tester calling. Two questions, please. One was just if you could help us on the ecosystem around you and hybrid bonding and just talk a bit about maybe the progress being made, particular test and inspect metrology to keep up with your roadmap as you're bringing down the geometry, where they are versus you, how you would expect that based upon what you understand it developed in the immediate next period. And I have one other question.

Well, that's a very important question. ever smaller geometries and then also 3Ds and so stacked devices where you can't look inside whether every bond is correct. Metrology is one of the critical factors in making this next step in this industry. On the other hand, we are talking about hundreds, 50, 200 nanometers and then going down. Don't forget in the front end, they're talking about seven, five, three nanometers. So the inspection methods are clearly, yeah, also under development in many years progress. Testing the same way, yeah. So how do you test these devices? Functional test. But that's all in, yeah, let's say the development of an end product.

Okay. Would you say that the test and inspect and the metrology is keeping up with you at this stage or will they shortly be keeping up with you?

Well, I think it's fair to say that we're all making that progress. Otherwise, the end customers couldn't make the commitment to using this technology. We always try to look at the end user and the end application. Where is this device used? And that tells you how... And the question earlier about high-end smartphones, you can imagine there's a lot of development, but is that already completely, let's say, established for mainstream applications?

Okay, thank you. And the other question, please, was just if you could give a sense on the Chinese subcontractor utilization, what understanding you have as to where they've reached and the extent to which you may expect them to to re-engage at a normal pace in the next coming quarters or not?

Well, there are two answers to that question. Number one is we see utilization rates carefully improving from what we mentioned in earlier calls around the 50 and sometimes even somewhat lower. And that could lead to around early next year. On the other hand, As we mentioned, there's a clear trend of non-Chinese customers using Chinese subcontractors to move out of China. And the question will be, at what pace? And what is very important is there has to become more clarity on what the restrictions, the latest restrictions of the U.S. imply. Because that will determine, of course, also the infrastructure capacity expansion or not in China. And that is today not really known. That's why we also in our press release simply made that comment that there is additional uncertainties. But we expect that to be clarified pretty soon, because all of us are simply asking, what does it mean?

Very good. Thank you for the answers. Thank you.

There are no further questions. I will hand back to you, Mr. Blickman, for the closing remarks. Thank you.

Well, thank you all for your questions. And if there are any further, then please don't hesitate to contact us directly. Thank you. Bye-bye.

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