Good afternoon, ladies and gentlemen, and a warm welcome to the H1 2024 Results Call of AIXTRON SE. At this time, all participants have been placed on listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Christian Ludwig.
Thank you, Anna. Welcome to AIXTRON's H1 2024 Results Call. Let me quickly introduce myself. My name is Christian Ludwig. I am the new head of IR at AIXTRON since May 1st, so this is my first earnings call for AIXTRON. I have met, or at least talked to many of you already in my first month, and looking forward to meet the rest of you as well soon. Now, I'd like to welcome our CEO, Dr. Felix Grawert, and our CFO, Dr. Christian Danninger, who will guide you through today's presentation, and then take your questions. This call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcast without permission. Your participation in this call implies your consent to this recording.
Please take note of the disclaimer that you find on page two of the presentation document, as it applies throughout the conference call. This call is not being immediately presented by webcast or any other medium. However, we will place a transcript on our website at some point after the call. Now, without much further ado, I would like to hand you over to our CEO for his opening remarks. Felix, the floor is yours.
Thank you, Christian. Great to have you on board now. Let me also welcome you all to our Q2 2024 result presentation. I will start with an overview of the highlights of the quarter and then hand over to our CFO, Christian, for more details on the financial figures. Finally, I will give you an update on the development of our business and on our guidance. Let me start by giving you an update on the key business developments of the second quarter on Slide two. The most important messages for today, from my viewpoint, are: despite an overall softer market environment, we have maintained our competitive position, and we could recognize strong orders in second quarter 2024, with EUR 176 million, mostly driven by power electronics. We concluded the quarter with revenues of EUR 132 million in the upper half of the guided range.
The gross margin came out as expected at 37%, which is lower compared to the previous year, due to a product mix comprising a larger share of lower margin LED tools. Most interestingly, we could further expand our strong position in silicon carbide. In Q2, SiC-based systems accounted for 57% of the incoming equipment orders, while gallium nitride-based systems made up 29%. Our market position in silicon carbide has been strengthened throughout the last two quarters with new customer wins. We were able to win an additional top five player in SiC. Furthermore, we have secured a substantial volume order from China, and we could win several new customers for our G10-SiC tool, amongst them, several from Japan. You may also have seen our recent press release together with Nexperia for a G10-SiC repeat order, a new G10-GaN order.
This is the result of the recent technical progress we have made with the G10-SiC. So while important new SiC customers drove the business in the first quarter, in the second quarter of this year, we have also secured major follow-up orders from existing SiC, as well as gallium nitride customers. Mostly driven by power electronics, our equipment order backlog at the end of Q2 increased to EUR 401 million, up almost EUR 50 million from the year end of fiscal 2023. In June, we further announced the acquisition of a production site in Turin, Italy. This addition to our manufacturing footprint addresses the expected increase in demand from major customers and will be able to cover future order peaks at all times. Furthermore, this gives us better access to the strong manufacturing ecosystem in Northern Italy.
The softer end market for power devices has impacted our delivery schedule. Customers are continuing to place orders, but delivery is pushed out in some cases. Therefore, we have adjusted our fiscal year 2024 guidance. We now expect revenues in the range of EUR 620 million-EUR 660 million, with a gross margin of 43%-45% and an EBIT margin of 22%-25%. Christian will now provide a more detailed look into the financials, and then I will take over with an update on the market. Christian?
Thanks, Felix, and hello to everyone. Let me start with the financial highlights of our income statement on Slide four. We had a good quarter in a difficult market environment, with revenues at EUR 132 million, compared to EUR 174 million last year. This is due to the fact that in the last year, some shipments and revenues had been pushed from Q1 to Q2. In the first half of 2024, we recorded revenues of EUR 250 million, which were exactly in line with last year's H1 revenue number. Gross profit in Q2 of 2024 was at EUR 49 million, and EBIT for the quarter was at EUR 13 million. The gross margin was at 37%, compared to 42% in the year before, both in Q2 as well as H1, driven primarily by product mix.
In both Q1 and Q2, we shipped a larger share of old generation systems like G4 and G5, compared to last year. These systems come with lower margins than the new G10 generation. Especially in Q2, we shipped a larger share of LED tools, which come at a lower margin. To be clear, these effects were expected and are baked into our full year expectation. OpEx in the quarter went up to EUR 36 million , predominantly driven by higher R&D spending compared to the previous year. We are currently finalizing the development work for the G10 series, while we have started the development of our next generation systems already. As I said earlier, we will see an increase of R&D expenses in 2024 by mid-single digit euro million number compared to 2023.
In 2025, we target R&D spending again around the level we have seen in 2023, in absolute terms. SG&A will remain flat in 2024. Now to our key balance sheet indicators on Slide five. We've seen a further slight increase in inventories to EUR 448 million compared to EUR 436 million at the end of Q1. Referring to our last results call, the high inventory levels are still the result of our strategy to load the supply chain early enough to secure on-time delivery of our products, despite tight supply chains. As we saw, the supply chains are overall relaxing. We adjusted our strategy and are on the way to reduce buffer stocks. For 2024, though, we had prepared inventories to secure the initial full guidance range, including the upper point.
When we saw that 2024 is coming in softer, we further decided to slow down the supply chain, but some orders were so far progressed that we decided to take delivery, leading to this further small increase in inventory. But this should now be the high water mark, and we expect a reduction of inventory levels, with the effects kicking in in the second half of 2024, when the larger shipments are planned, and some effects will take until summer 2025 to materialize in full. Trade receivables at the end of June were at EUR 117 million, compared to EUR 158 million at the end of 2023, and flat versus the number end of March.
The improvement versus year-end 2023 was mainly a result of the collection of the payments related to the large shipments in the last quarter of 2023. The advanced payments received from customers at quarter-end were EUR 133 million, representing about 33% of order backlog, very much like in the last quarter. Now, moving on to our key cash flow indicators on Slide six. Our operating cash flow improved strongly, both in Q2 as well as H1, as the inventory build stabilized. After 6 months, operating cash flow stood at EUR 13 million, an improvement of EUR 80 million, versus last year's EUR -71 million. In the second quarter, we generated EUR 20 million of operating cash flow, a swing of EUR 96 million, versus last year's EUR -76 million.
Free cash flow also improved on the back of the improvement in operating cash flow. In the first half, it came in at EUR -56 million, compared to EUR -80 million last year. The improvement was less pronounced than for the operating cash flow, as our CapEx in H1, at EUR 69 million, was significantly higher than last year's number of EUR 10 million. This is primarily due to the investment into the innovation center, as well as the investment in our new Italian facility. In summary, we will see a turning of inventories in the second half of the year when the larger shipments are planned, which should result in an improved operating cash flow. At the same time, CapEx will come down in the second half of the year as we approach the completion of the innovation center.
These two effects should result in a strong free cash flow in the second half of the year. Our cash balance, including other current financial assets, as of June 30th, decreased to EUR 79 million from EUR 182 million at the end of 2023. This reduction was mainly due to the mentioned CapEx projects and our dividend payment of EUR 45 million in May. After Q2, we have signed and closed a revolving credit facility for EUR 200 million to further strengthen our financial flexibility. These facilities are available for all purposes. With that, let me hand you back over to Felix.
Thank you, Christian. Before giving you some more details on our adjustment guidance for 2024, I would like to continue on Slide seven and give you an update on our views on the different end markets. With our G10 tool family, introduced on the market since September 2022, we have a state-of-the-art product offering, that offers the best-in-class cost of ownership. With the G10 family, we cover all our key end markets, while we have exciting growth applications ahead of them. Overall, we are very pleased with the market traction of our G10 series. We expect that the G10 family will make about 50% of our equipment revenue in the full year 2024. This is a very strong adoption, roughly one year after launch, given the required qualification cycles in all applications we address.
This confirms that our strong focus on on technology and innovation is paying off. We aspire to continue this strategy in the years to come.... On Slide eight, you can see which tool addresses which application. Let me briefly touch the optoelectronic area, where we see stable demand, which is driven by datacom and telecom lasers. Datacom lasers are critical to data centers to meet the higher demands of AI workloads, both for intra data center and data center interconnect requirements. We maintain a clear number one position in the laser market with a strong market share, and we are very well prepared with the G10-AsP to secure this position. Now, to the LED and micro LED markets. As stated in the Q1 call, in 2024, we see a wave of investment into traditional red LED capacities ongoing.
We expect high double-digit euro million revenues in fiscal 2024 from this market. What we see happening is that players, which have been traditionally only serving blue LED, are now investing into red capacity as well. Our G4 is here, the tool of record in this segment due to its track record. On micro LED, where the G10-AsP is the tool of record, the industry continues to work on micro LED technology despite the news from Apple and ams OSRAM in Q1. Micro LED revenues for fiscal 2024 are expected to be at high double-digit euro million, driven by several customers building R&D and pilot production lines to commercialize the technology. The manufacturing of micro LEDs is challenging, particularly the mass transfer aspects. This makes timing predictions difficult, but multiple customers have confirmed their continued interest.
Let me continue in more details, with the GaN power electronics market on Slide eight. There have been some exciting developments lately that I would like to share. We see the market accelerating, fueled by more and more applications, and provide you an update as we realize that market analysts capture most, but not all trends. Especially the future developments in this application appear not to be well understood until now, and we believe that they are important for you to understand our recent strategic moves, such as the investment in our Italy location. The Slide nine depicts the deployment of our GaN power technology application by application. We have ordered them by voltage class on the Y-axis and by time of market adoption on the X-axis. Please recognize that these specifications are approximate and don't aspire for precision.
You may recognize a number of past developments that have driven GaN volumes in the past, and that we have discussed in this place. In 2019, 2020, the first wave of products were fast chargers for consumer applications such as smartphones and also notebook power supplies. 650 volt was the first voltage to get large market traction. The first generation of GaN products by most players was on 650 volts. The high voltage, high power AC to DC power converter used, for example, in data centers, were the next application, which continues to grow in volume even today. And a derivative of that were Class D audio devices, which some of you may be enjoying at home. Most recently, we've seen the emergence of low voltage GaN products, such as 100 volt and 200 volt products.
Initially pioneered by smaller players, these products now have become part of the portfolios of most of the big GaN players. This comprises DC to DC power stages used in data centers, but also in automotive, solar panel inverters, and specialty devices such as wireless chargers and LiDAR applications. The most important volume driver here is probably the usage of GaN in low voltage motor drives, also called BLDC, be it in battery tools, battery-driven consumer applications, or in low speed electric vehicles. This is a huge market, which might be 3x-4x larger than the high voltage market, to my estimation. Most recently, we have seen GaN devices emerge for high voltage motor drives. Texas Instruments launched in June of this year at the PCIM Power Electronics Trade Show, a three-phase, 250-watt power inverter.
With such devices, you can massively boost the energy efficiency of home appliances, and we all know that efficiency has become one of the key selling points in white goods. Furthermore, we see gradual adoption of GaN in electric vehicle onboard charger, in short, OBC. Here, gallium nitride competes with silicon carbide and with traditional silicon power devices, but it has benefits when it comes to bidirectional charging. Overall, we can say that GaN is set to replace silicon application by application and step by step. Many of these applications, but not all, are captured by market analysts. What is not fully captured yet, in the market predictions by analysts, in our view, is the next and upcoming wave of GaN applications.
The most exciting are GaN power delivery for AI chips and highest voltage GaN at 1,200 volts for electric vehicles' main inverters. First, to page ten. Let us have a look at GaN power delivery for AI chips. You all know that one of the biggest challenges for AI is the energy consumption. The power consumption of NVIDIA AI chips is growing by a factor of three from 2020 to 2025.... A recent study published by the German business newspaper, Handelsblatt, expects global power consumption driven by AI to grow from about 40 TWh in 2023, to about 140 TWh by 2028. This is in five years or 30% CAGR per year.
At the recent IMEC Technology Forum this year, Lisa Su showed the power consumption needed to train the next generation of LLM, which equated to the power output of an entire nuclear power plant. Quite big number. In short, the industry must address the power consumption of AI chips to enable the continued evolution of this technology. We can, and we will contribute with GaN for power delivery to address this challenge. Throughout the next generation of AI GPUs, GaN switches will gradually be deployed in the conversion chain from the wall plug at 240 volts, to the individual CPU and transistor at one volt. The conversion and distribution across the chip occurs in multiple steps. First, down to 48 volts, then 12 volts, and then finally to one volt, where the individual transistor is sitting.
In all these conversions, you have silicon power devices today, and they are all set to be replaced by gallium nitride chips in the future to increase the conversion efficiency. This is particularly interesting because the die size increases with current. In an oversimplified manner, you might say that for a 1,000-watt power supply or power, you might need four to five switches of 1 amp to carry the load at 240 volts, but close to the individual CPU and the individual transistor, you might need 1,000 switches of 1 amp to carry the same load. And because at one volt, one volt is the voltage used within the chip. This is not precisely the math, but it serves me to illustrate the idea, that the further you go down in voltage, the more switches you need and the more die size you need.
We expect this growth opportunity to kick in 2026 or 2027 onwards with gallium nitride. The other trend that we would like to bring on your radar today is the usage of GaN in very high voltage application on the other side of the spectrum. We have illustrated this at page eleven. Until today, these applications were exclusively served by silicon IGBTs and silicon carbide MOSFETs. Now, gallium nitride has also achieved breakdown voltages of 1,200 volts, which you see on the left. Multiple customers are working on GaN technology for the electric vehicle main inverter, also in collaboration with car OEM. In this application, gallium nitride takes on the direct competition with silicon carbide. Those players who focus on GaN for highest voltage assume that gallium nitride will realize a steeper cost down curve compared to silicon carbide, and eventually be the more cost competitive solution.
This trend would be beneficial for AIXTRON, because in silicon carbide, the substrate makes up a big part of the cost, while in gallium nitride, the epi takes the largest share. We don't know today how this race will eventually turn out, but we are preparing for it in terms of potential volume upside. When the wave comes, we are ready to catch it, and we want to address the resulting customer demand. Hence, overall, we see ourselves very well positioned with our G10 GaN to address these applications and the resulting requirements of our customers, be it in terms of technology or in terms of high volume manufacturing capabilities. With that, let me now turn to our view on the current silicon market, silicon carbide market dynamics. We observe that at this point in time, the overall market worldwide has built more capacity than there is demand.
Nevertheless, we and our customers remain very positive about the mid to long-term outlook. The electric vehicle market will continue to grow, driven not only by regulatory demand, but much more importantly, by better product offerings. In segments where the car offering is attractive, the EV adoption is currently increasing. We will see, as we expect, more and more cars with next generation battery technology coming to the market, offering lower cost and better range, and all this also requires silicon carbide inverters. Furthermore, the situation at each of our customers varies strongly. Despite the overall market slowdown, the volume ramp of a number of larger players continues, while smaller players appear to be consolidating or slow down significantly compared to their initial plans. We had anticipated increasing cost pressure and commoditization in the silicon carbide market right from the beginning, and our expectations are now being confirmed.
This trend increases the focus on cost per wafer, which plays to the strength of our product. The G10-SiC has established itself as the most productive tool in the market, meeting the required technical specification and offering the lowest cost per wafer. We maintain a clear number one position with a growing market share. Our very strong silicon carbide orders, booked in Q2, are the best evidence for our view on the market and our competitive position. As I said the last time, money talks. Now, let me move on to our infrastructure investments, which we have made in light of the expected market developments that we outlined just before. In June, we announced the purchase of a new site near Turin, Italy.
An existing building was acquired for a single-digit million euro investment, including the facility investment. Total spend will initially be a low double-digit million euro figure. This will allow us to rapidly expand our production capacity up to a potential twofold increase of manufacturing volume in the future. Such increase would require further investments in the infrastructure of the facility and hiring of additional staff. With this, we are strategically preparing ourselves for the future, which I just described in power electronics. The Turin site especially gives us the flexibility to address the expected increases in demand from major customers, and it will be able to cover future order peaks at all times. Finally, in May of last year, we've announced that we will be expanding our facility at our headquarters in Herzogenrath, Germany, with the new innovation center.
This is adding about 1,000 square meters of clean room space to our R&D operation. It will allow us a much deeper collaboration and co-development with our customers. The construction is progressing well. We expect to move our first systems into the innovation center as planned in the second half of the year. With this, let me now give you an update on our adjusted full year guidance for the year. As stated before, the stated significant amount of orders received in Q2 is already for shipment next year. Hence, we have adjusted our guidance for 2024 as follows: We expect total revenues in the range between EUR 620 million and EUR 660 million, before 630 to 720.
We expect a gross margin in the range of 43%-45% , which is unchanged, and we expect EBIT margin in the range of 22%-25% from before 24%-26%. Our revenue guidance for the subsequent quarter is as follows: For Q3 2024, we expect revenues between EUR 150 million and EUR 180 million, where production plans will be quite balanced between Q3 and Q4. Shipments will be more Q4 heavy, based on customer plans to take delivery of the systems, which are mostly derived from customer set completion dates. We have seen this in the last year, so nothing new here. And with that, I'll pass it back to Christian before we take question .
Thank you so much, Felix. Thank you, Christian. Anna, we're now ready to take the questions.
Perfect. Thank you very much, Christian. Dear ladies and gentlemen, if you have a question for our speakers, please press nine followed by the star key on your telephone keypad. Nine to enter the queue. If you find your question is answered before it is your turn to speak, you may press nine followed by the star key a second time to cancel your question again. So one moment, please, for the first question. The first question comes from Martin Marando of ODDO BHF. Please go ahead.
Hi, thanks for taking my question. My first question maybe is on the order momentum. Can you maybe a bit comment what you said a few weeks ago, meaning that you expect similar kind of orders over the next few quarters? Is it reiterated? And I have a follow-up.
Yeah, definitely. Thank you. Yes, we looked, when I made that statement, and I can reconfirm that statement today, yeah. We looked at our pipeline and, the discussions we currently have with customers, the pipeline is quite strong. We have ideas when some of the customers want to have the tools, we know our lead times, and based on all these factors, we have given out our expectation that the momentum, in the Q3 2024 and also the Q4 2024, will be somewhere on the level of what we've seen in the second quarter.
Yeah, and it was important to us to give that message, yeah, to really show you that the second quarter is not just a one-off, and then afterwards it goes down, but we clearly expect Q3 and Q4 to be on the same level.
Okay, thank you very much for the clarification. Maybe now a question on GaN, since you talked a lot about it during the presentation. What is your visibility on GaN adoption for AI power delivery? Meaning that, can you help us understand all the cycle between qualification, adoption? How long does it take before the chip is being qualified, and you have some idea of when GaN will be really adopted in a massive adoption in AI?
Thanks, thanks. You asked the million dollar question. So we put in the presentation, and that's the best guess we have as of now, that this is gonna start in 2026, 2026 onwards, so to say, then a trend ramping up in volume. Again, a lot of this happens at our customers who use our tools at G10 or some of the older generations, yeah. So to say, to do this, so not everything is transparent to us, but that's the best guess we can give.
We all know that the energy consumption is a very pressing point to the industry, so we see that there's a big demand, a big need, and I think everybody is now running as fast as they can, and this year, 2026, is our best estimate. 2026 onwards, yeah. Kicking and starting in 2026, and then in the following years to draw volume. Yeah.
Okay, thanks very much. Maybe the last one, if I may, on the laser business. How do all the innovation we are seeing today on photonic and 3D integration of photonic ICs directly on the packaging translate into demand for external laser business? I mean, what I'm trying to understand is that does that necessarily mean that laser demand will be structurally higher compared when the photonics is not on the packaging?
Mm-hmm, mm-hmm. Thanks. That's a very, very good question. So what we do see is overall, that the data volume is, it continues to exponentially grow. Yeah. Again, lasers and optical data communication can be one factor contributing to the energy challenge of AI, not to the compute within the chip, for sure, but to the compute, from, from, from one card to another card, yeah, so the data transfer within data center, but also from data center to data center. So we expect overall an increase in demand. Now, how exactly that plays out with multiple different and various architectures being currently discussed, the question you raised, we don't have full transparency on that one yet, yeah? As soon as we have transparency, I'm very happy to provide an update here in this place.
Okay. Thank you very much.
Thanks a lot. The next question comes from Olivia Honychurch of Jefferies. Please go ahead.
Good afternoon, and thank you for taking the question. My first is on the 2025 outlook. Now that we're at the half point in the year, it feels like a good time to be checking in on where you're seeing 2025 growth versus what you guided for us at the FY 2024 results in February. Back then, you said that you were expecting strong growth in revenues in 2025, and given that since then, you've downgraded your 2024 guidance because of some shipments pushing out of this year and into 2025, can we therefore assume that the growth outlook for next year is even stronger than what it was as those shipments switch from this year to next? And then I have a follow-up. Thank you.
Thanks a lot, Olivia. Honestly, it's a bit too early given the dynamics in the market, to comment now reliably on 2025, yeah? I think a lot is currently in dynamic and changing. Just look what today's day has brought to the market, yeah? I would want to wait a little bit before providing indications for 20 25, yeah? What I can tell you is, and what we have already outlined here, is that we do see, especially in silicon carbide, some of our large customers continuing to invest through the cycle, yeah, with a clear ambition to have factories up and running, yeah, capacities not only installed, but really fully operational, yeah, in full swing, with full yield and full operational efficiency.
That some of those customers are clearly gearing up to say, "Look, today, there's many, many, many players in the silicon carbide market. There is gonna be a shakeout," yeah? We've just seen some news this week, yeah. And if I'm the first one to invest through the cycle to put up the capacity to have it up and running, I achieve a superior cost position, yeah, and at some point, I can then gain market share, yeah? And some of those players who have this cost focus and volume focus have chosen deliberately our tool, and they do continue to clearly place orders now with clear shipments already in 2025. So they don't care so much about the current environment, but they rather put those capacities in the ground, yeah? So that I do confirm.
However, how that fits up to the total picture, which is needed to give an outlook for the overall guidance, that's a little bit too early, given how many moving parts are around us.
Okay. That's fair. Thank you. My follow-up is around the full year margin guidance. So 37% is what you achieved in H1 on the gross margin level. Your FY 2024 guidance is 43%-45%. You'll be needing to get above 46.5% in H2 to get to even the lower end of that target range, which I think would be the highest gross margin you've ever achieved. What gives you the confidence that you can get to that level, particularly in such a low growth year on the top line?
Yeah, Olivia, I take the question. Well, I mean, we, we are quite clear on the shipments in the second half of the year, given our order book. The, the key here is, of course, a much, much better product mix than, some better fixed cost degression due to the higher, volumes. And all of that together then, will, result in this improved gross margin that will bring us, to the target. So the key here is really the improved product mix, also the end market mix, but also the, new generation versus old generation mix.
That's great. Thank you.
Thanks a lot. Next question comes from Michael Kuhn of Deutsche Bank. The floor is yours.
Yeah. Thank you. Good afternoon, gentlemen. Firstly, one on order intake, which was obviously strong in the second quarter. Still a major part of that seems to be for 2025, and that, let's say, despite the fact that you have, let's say, substantial inventory, which I think your clients also see. So my question would be: What makes your clients order now, with such a substantial lead time? And were there any, let's say, concessions on your side made towards the clients to make them order now, be it on prepayments or any other contract conditions?
Great, great, great question. I could see you also as being a purchaser at one of my customers. No concession with me, sorry, I have to decline. So on a serious note, Michael, no, some customers have clearly their fab build-out plans, especially those silicon carbide guys I was talking about. And they put their factories on the ground. They have their clear plans, when they want to ramp, when they want to get volume up in place, and they see no need, so to say, to push out ordering of the equipment. They rather put the orders in place, when they have their plans and the plans are getting ready, yeah?
We would not be putting concessions on getting nice numbers, but in the end, get lower margins. Sorry, not with me.
... That is good to hear. Thank you. Then, staying with related topic, inventories, you mentioned only a slight increase in the second quarter, and you obviously said earlier that you only expect an improvement in the second half. Let's say, as we are now in the second half, and you probably have a clearer picture, if you're comfortable to roughly quantify what kind of reduction you could achieve in the second half, and you mentioned some measures only taking effect into 2025, so maybe also a rough outlook on 2025, and let's say, what level of inventories you would feel comfortable with over the upcoming quarters?
Thanks a lot. Let me also take that. So by the middle of 2025, we want to be back, back to normal. So when we talk in 12 months from now, we want to be back, back to a normal level. The reason is we have decided to take a soft braking strategy rather than a hard braking strategy, because we clearly want to be in a collaborative situation with our suppliers, yeah? You see, despite the weak environment, we are doing well. We have a very good cash position, yeah? And, we didn't want to break it too hard because at some point the next upswing is coming. Yeah, we're clearly seeing already that, towards that. And then we will be on the other position, not slowing down with our suppliers, but rather asking them to accelerate.
And that was the reason why, instead of doing a hard break strategy, which of course we could have done, yeah? Let's say we decided to do a soft one, and you will see a gradual regression by the Q3, not too much, don't over expect. You will see, and then you will see a regression of the inventories, Q4, Q1, Q2, and by the middle of next year, we should be back to normal, yeah? It really follows from our strategy.
Okay. And could you, let's say, like, quantify back to normal?
Well, you know, like, levels of... I would, I would consider normal levels of 60%-70% of order backlog. Yeah.
Okay.
With some further optimization of our, like, our internal processes, maybe we can get down even further, but that would be my best guess right now.
That's a clear quantification. And then, one more on, let's say, LED/micro LED. Could you provide a rough split for the first half, what the contribution of each of the two was? And, let's say, how much more, let's say, margin dilutive old tool LED business you expect to generate in the second half of the year?
So let me just check the numbers here. I think in the second quarter, the whole was 40% or over 40% of the total revenues. Yeah, so that was quite a big one. I think throughout the first half, maybe 25, something like that, 25, 30, something like this, yeah. So to say, a little over 30, as a total. And, honestly, the split in what it made is, we don't have the numbers here in terms of margin effect. I mean, you saw the overall cost margin where we came out, that's clear, yeah. And the major hit, of course, came from the traditional red LED part, which comes at a lower margin.
All right. No, understood. And then, very last question, promised. I think in some point in the release, you speak about ongoing upgrades of the G10 and SiC. Is that also applying to tools that are already installed at your clients' sites? And, was there any cost associated to that in the P&L in the first half?
Yes, that definitely applies to tools installed at our customer. So basically, that involves a certain qualification time, and after that, the customer then buys the upgrades, and that's given that it improves the tool. It's not free of charge, but it comes at a charge because it's improvement that we provide to the customer. So no, it doesn't come at a cost, but rather it comes as a benefit to our customer.
Perfect. Thank you very much.
Thanks a lot, Michael. The next question comes from Madeleine Jenkins of UBS. Please go ahead.
Hi, thanks for taking my question. We hear your customers referring to the consumables, the silicon carbide epitaxy, as, like, a key factor to consider when choosing a supplier. I was just wondering if you could talk a bit more about that and what that involves exactly, and also how it might differ between a batch tool versus a single wafer. Thank you.
I didn't fully get the question acoustically, Madeleine. Could you please repeat?
The consumables for silicon carbide epitaxy, just kind of what that involves exactly, and then how it differs from a batch to a single wafer tool.
Yeah. Okay, so I do understand the question, is how consumables contribute to the difference of batch to single wafer tools? Is that the question you are asking?
Yeah, exactly. So we talk to your customers, and they say that it's very important in deciding what tool to go for. So just any color you can provide on that would be good. Thank you.
Yeah, very good. Okay, now I do get the question well. On the consumables, we've made a big effort to make sure that this contributes to our superior cost position that we can achieve with the batch tool. And that's also what we get back from our customers. So we see this as a clear advantage of our tool and to the superior cost position, which helps us get the market gains that we are currently seeing. There's not much to say, honestly, about it.
Okay, thank you. And then my second one is just obviously today you talked about gallium nitride, potentially being used for EV inverters. Now, obviously, it's kind of one of the biggest markets for silicon carbide currently. So I just wondered how you saw inverters kind of being split between the two materials, and also whether it impacts sort of your longer term, kind of, silicon carbide demand. Thank you.
Mm-hmm. Well, I think the split is a technology battle, and nobody knows how this battle will end up, yeah, between gallium nitride and silicon carbide. What we can say for sure is that any switch from gallium nitride to silicon carbide has a clear net, net benefit effect for AIXTRON. Because as I said before, in silicon carbide, the biggest cost item is the substrate, or still today, is the substrate. But in gallium nitride, the biggest cost contributor or value-adding step, you could also say, is the epi, yeah? So if volume is getting shifted from silicon carbide to gallium nitride, that means that the addressable pie for AIXTRON is getting bigger. And this is also the reason why, of course, we work to support this trend in order to grow our market share of the overall silicon carbide value chain.
Now, how this battle exactly plays out, it's gonna be a battle which is continuing or which has a couple of years ahead of it, yeah? Silicon carbide, apparently, is currently in the volume ramp, yeah. It is, it contributes to the electric vehicles reaching a long range, long driving range, which is one of the key buying factors for EVs, or for battery electric vehicles, at least. And now, in the next years, we have a cost down roadmap ahead of us for both silicon carbide and for gallium nitride, yeah. Each of these technologies will come with multiple generations of dies, yeah? I think silicon carbide is somewhere around generation three, generation four, depending on which vendor you are talking to. Gallium nitride is still somewhere on generation one, generation two, so pretty early in it.
And now it's gonna be a technology race, a cost down race between these two technologies, yeah, on the roadmap. Essentially for a given, whatever, switch performance, yeah, whatever you want to switch for a car of, let's say, 100 kW, yeah, mid-sized car. You know how much die size area and how much cost do you need for this one, yeah? It's gonna be a very interesting race to watch.
Okay, thank you.
Thanks a lot. The next question comes from Didier Scemama, Bank of America. Please go ahead.
Good afternoon. Thank you for taking my question. It's a follow-up to a previous question, I think, Olivia asked about 2025. Just not sure I understand the reluctance or hesitation to guide on 2025 at this stage, given your confidence on the order intake in Q3, Q4, and a pretty strong order intake in Q2 as well. So can you just maybe walk us through what are the pros and cons of that hesitation? I mean, I understand EV demand is a bit weaker, et cetera, et cetera, but surely you've got, you know, backlog maturity. So are you worried about pushouts or are there any other elements to take into account? And I've got a quick follow-up.
Thanks a lot. I must smile. So first reason is historical. We've never done it before, so at this point in time, but we always, at this point in time, get the question for a well understandable reason. And no, on a serious note to your question, as I said before, we have a very good visibility on the silicon carbide, where I think we've given out a very bullish statement, as I made before. But the rest of the market is a bit of moving pieces, and the rest of the market comes a little bit on shorter term notice, and we simply don't know how that plays out. Yeah, it's too early to say.
Okay. Okay, that's fine. On the LED order strength, which I think contributed to your gross margin dilution, can you just explain why suddenly there was a sort of burst in orders in that particular market? I thought you were far less active in that market, that was sort of dominated by AMEC. Is there, is there a change in the competitive landscape? Do you have a better product than you used to, at least certainly lower cost than you used to?
No, this is a very good question. So the market, it was a market which in past years always used to be there and constantly ongoing. And then with the China housing crash, that market collapsed completely, because there was just overcapacity in the market, and the market was dead and muted. And now what we do see is that gradually the market is coming back, and especially the market is coming back with what I mentioned before, additional players, new players entering the market as they see opportunities to get part of this market. And as so to say, there is again a reemergence of that market, we get orders again. And this is a market where we have an extremely strong position. This has nothing to do with the local Chinese player.
Okay. All right. Thanks very much.
Perfect. Mm-hmm.
Thank you. Next question comes from Martin Jungfleisch of BNP Paribas.
Yeah, hi, good afternoon. I have two questions, please. First, on the silicon carbide order in the second quarter, can you tell us how much will be delivered of that EUR 105 million in 2024, and how much will be recorded in 2025? And then maybe if you can also comment, how much of that order was coming out of China, please?
That's a very good question. I don't have the data here. I have to do it out of my memory, so my message is a bit inaccurate, but qualitatively, I can give it to you. I would guess 25%, 30% gets shipped, still in 2024, from what I know, which customers are behind it. The rest goes into 2025. And mostly there is two existing customers behind of it. And one new customer, which we got on board, in the first quarter. This was in the first quarter, we announced the news. The customer is on board now in the second quarter. There was a very big volume order, placed from that customer.
So the majority goes into 2025, and out of those orders, there was also a decent part coming out of China. I think there was multiple China customers amongst that. So yes, there was a certain China fraction, but I'm not able to quantify how much of that it was.
Okay, that's fine. Thank you. And then maybe a follow-up on the gross margin guidance. You left that unchanged, while the downgrade on the revenues came from power semis I noticed that. So, was LED opto also pushed out, or was there any other factors why you kept the gross margin guidance changed?
Exactly. I think for the, for the full year, for the full year, I, I think the product mix didn't change significantly, as Christian mentioned already before, yeah. So for the full year integrated over all the four quarters, so that in the end, we can say that, that we could keep it, keep it on the same level. It was just a proportional cut from the revenue and from about the product mix, you can say in a, in a simplified manner.
Okay, makes sense. Thank you very much.
Thank you. We are moving on to the next question. Next question comes from Jürgen Wagner of Stifel. Please go ahead.
Yeah, good afternoon. Thank you. On your, a follow-up on your LED business, you mentioned strength in traditional or new LED in China, but as well, micro LED. How sustainable do you see both going forward? And, yeah, with this new fab in Italy, you showed us a slide where you mentioned additional EUR 1 billion revenues. What capacity does that give you in total in terms of revenues? Thank you.
Very good question. So first of all, on your, on your question about an LED and micro LED and, and how sustainable. I think that's a very good question. I said before, on the question we just had, the LED business is a, yeah, reemergence of a segment which had been dead now for two years due to the housing crash, yeah? We hope it's sustainable. Let's see, with China, it's always a bit uncertain about what comes in waves and what is really a longer term. I believe some will stay. Whether it stays on this this level, I don't know, simply. With micro LEDs, the orders we see is coming from customers building up first pilot lines, some customers continuing, continuing R&D.
Surprisingly, some new customers taking up R&D or doubling down on their R&D and pilot line activity. So that's the... I think the market believes this micro LED thing is dead, when in reality it does continue. Now, again, I think the question on what level that continues, it's a bit difficult to predict, yeah? Because as said, this is R&D and/or pilot line facilities, yeah? And the question is, does it continue just to be on R&D and pilot line status, or do we see, let's say, with the next two years, at least with some customers or for some subsegment of the market, the beginning of the volume ramp? And honestly, I don't have enough visibility to predict that. It would not be a serious message to give.
Of course, I hope that it comes, but I don't know, yeah. So that was on the LED, Micro LED. And help me, help me with the second question or the second part of your question was?
You had some slides on the Turin fab that you bought-
Yeah, mm-hmm.
-in your handout, and you said it will give you an additional, I think, EUR 1 billion sales potential over time. So in total, what, what size are you preparing for, adding your current capacity?
As said before, the main motivation was to be able to address the peak volume. So we had multiple customers asking for peak volume. So asking, "Hey, if we need this and this large number of tools, and we need to squeeze that into whatever six months, yeah? Because we have a new volume segment coming, and we want to address that within a relatively short period of time. Can you be absolutely sure that you can ship, even in case where you are pretty much loaded in your existing facilities, yeah? And in order to provide this peak capacity, that you always find the word peak in our slides, that was for now the main motivation. Yeah, just to make that clear.
Now, if we would load our existing facility in full and in parallel, if we would load the Italian facility in full, I think we would be able to reach somewhere EUR 2 billion-EUR 2.5 billion in revenue out of these two factories. Yeah, so there is enough headroom from where we are today.
Okay, understood. Thank you.
Thank you very much. Next is Ruben Devos of Kepler Cheuvreux. May we have your question, please?
Yes, that is of Kepler Cheuvreux .
Oh.
Hello, do you hear me?
Yes, we do.
Okay, great. So, I had a question, just final, final one on, on LED, basically. I mean, if I hear you well, you're talking about reemergence and, and the pilot and R&D production lines, significant demand there. I think obviously, investment cycles can be notoriously lumpy, but looking into next year, we should not be expecting sort of a drop-off right here. That's, what we should take into consideration for our models. And I think even for this year, like, did I misinterpret correctly, that basically you would have a significant double-digit million euro contribution, both for traditional LED as from micro LED this year? In other words, in excess of EUR 100 million for 2024? That's the, that's the first question.
... Well, yes, both of them, that's correct, yeah. So both of them together, they will contribute in a level higher than EUR 100 million, yeah. No, that has not changed, yeah?
Together, not each together.
Together.
Together, and not each of them, just to be clear.
Exactly. And, the logic between the two, I mean, the one is the LED market with the dynamics that Felix explained, yeah, from the traditional red LED market from China, and the micro LED market, driven by R&D and color production orders right now. Yeah. Both of them, a little bit unpredictable, how they will continue in the next year, but for different reasons. Does that answer your question?
Yeah. Yeah, I guess so. I mean, obviously, always difficult to get a bit of a good gauge on next year, you know, given the lumpiness of the investment cycles. And I think in micro LED, we see a lot of contrasting activity, I would say. Some double down, you said, others are ramping up. So, we're just trying to get our heads around, you know, how we should think about micro LED this next year and maybe beyond that. But,
Yeah. Unfortunately, we fully understand the question, but we are unfortunately not set to give a serious guidance, yeah, on that one, because we simply don't know the answer before, yeah? And that, again, plays back into the questions we had on providing guidance towards 2025, yeah. If it would be just for silicon carbide and so on, we probably could, yeah. But for this thing, we simply don't know. There's too much uncertain at this point in time.
Okay. All right. And then just a second question on the Turin side. I think it looks like a great addition to expand capacity, but I would imagine that it will take some time before you start utilizing capacity here, as you still have plenty at Herzogenrath. So I was curious how you look at, let's say, the ramp-up costs or operating costs of this new site before you're running at full capacity, which I understood in the initial phase would be about 30%-40% extra. Could there be some drag on margins we should take into consideration?
Not too much. Honestly, it was a very lucky punch. So we looked across all over Europe for an expansion, yeah. It came clear from the timelines we wanted to secure. We wanted to go for a brownfield rather than a greenfield facility. And the facility we were able to get was an old injection molding plant, so a lot of the infrastructure in terms of how power, electronics, electrics, water supplies, all that is already in the ground, yeah? So it was just an outstanding deal that we could make, yeah. That was once we had it, we concluded relatively fast on that one. As we said, the initial invest we have to take to get it up and running is pretty low, excuse me, for that one, a low double-digit million euro.
It was just a great bargain, in other words, you can say. And our plan is now to install there, initially, a team to ramp it up, to get it up and running, yeah, a smaller team. You indicate the drag on margins or the cost situation. We have that very well in mind, yeah. And to really get the operations running and smooth, to get really efficient and good business processes and operational excellence and all that. And then we need to ramp that up to a level where it's running efficiently and smooth.
So clearly, having the topic about cost on the radar, this was a big part also of our discussion, such that then we are at a level, at a continuing level there, where for the situation that a spike, a volume spike is coming, which is ultimately the purpose why we built this for. We have enough substance, so to say, to ramp it up and to expand, yeah, but you can't do that if you just have three people, and then suddenly you want to have 100 people in the facility, that doesn't work. But let's say if you have 30, 40 people in a facility, and then you want to triple it, you have one person who can always train two other or three other people or supervise, you know, that's, that kind of an idea is behind it. Yeah.
All right. That's very helpful. Thank you.
Thank you very much. As there are no registered questions anymore, I would close the Q&A session now and turn the floor back over to the host.
Thank you very much, Anna. Thank you all for listening in, and thank you for your good questions. If there are any questions on answers, please contact the IR department. We will be at your disposal as always. For the rest of you, I wish you a happy summer holiday. We will be on the road in end of August and September, so for sure we're gonna see a lot of you, in person. And those we don't see, we will be back on October thirty-first with our Q3 call. Hope to welcome you all back at the latest then. Have a great day. Goodbye from AIXTRON SE.