The conference is now being recorded.
Good afternoon, ladies and gentlemen, and welcome to AIXTRON's conference call regarding the Q3 2022 results. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. Now I hand over to Guido Pickert, VP, Investor Relations and Corporate Communications at AIXTRON.
Thank you very much. Welcome to AIXTRON's presentation of our Q3 and nine-month 2022 results. I'd like to welcome our CEO, Dr. Felix Grawert, as well as our CFO, Dr. Christian Danninger. As the operator indicated, 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 our safe harbor statement, which can be found on page 2 of our results presentation slide deck as it applies throughout the conference call. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or transcript on our website at some point after the call. I would now like to hand you over to our CEO for opening remarks. Felix.
Thank you, Guido. Let me also welcome you all to our results presentation. I will start with an overview of the highlights of the quarter, and then hand over to Christian for more details on our financial figures. Finally, I will give you an update on the developments of our business and our guidance. Let me start by giving you an overview of the key business developments in Q3 on Slide two. Demand for our equipment remained strong with an order intake of EUR 143 million, up 25% year-on-year, driven by the strength of the growth markets our customers are operating in. The biggest demand drivers for the quarter are our systems for silicon carbide and gallium nitride power electronics. The single biggest contribution to orders in Q3 2022 already came from our newly introduced silicon carbide multi-wafer system.
This is very encouraging as we have just recently launched our brand new next generation silicon carbide system, G10-SiC, which our customers are already ordering in volume. Orders for tools to produce optoelectronics as well as tools to produce LEDs, including micro LEDs, also remain strong. As a result of all that, we can report a very strong order backlog of EUR 369 million, up 38% year-on-year. Our quarterly revenues are affected by some temporary circumstances, which are mainly due to a few customer-related delivery delays and the granting of export licenses, which were not yet available as of the reporting date. As we have stated during our Q2 results call, we expected our product mix to improve for the remainder of the year compared to the first half of 2022.
As a result of that, our gross margin improved up to 44%. Now I will hand you over to our CFO, Christian Danninger. He will take you through the Q3 2022 financials. Christian.
Thanks, Felix, and hello to everyone. Let me start with the financial highlights of our income statement on Slide three. As Felix mentioned, orders in the quarter continued to be strong and our backlog was up, fueled by the mentioned strength in demand. Revenues were at EUR 89 million, gross profit at EUR 39 million, EBIT at EUR 16 million, and net profit was EUR 19 million for the quarter, which is below prior year, mainly due to the mentioned temporary effects, resulting in a shift of some tool deliveries to Q4. Gross margin improved to 44% from 43%, as mentioned. OpEx in the quarter went up to EUR 23 million, predominantly driven by higher variable compensation elements combined with slightly higher R&D spending. We again utilized tax loss carry-forwards and capitalized some additional deferred tax assets in the amount of EUR 9.4 million due to expected future profits.
We expect to realize exceptionally higher shipments in Q4 and therefore revenues, gross profit, EBIT and net profit at a corresponding high level, enabling us to reach our upgraded guidance for 2022. Now to our balance sheet on Slide four. The previously mentioned shifted tool shipments and the inventory build-up to prepare for the higher expected business volumes resulted in inventories at the end of September in the amount of EUR 209 million. The advanced payments received from customers we had on our books at quarter end were EUR 122 million, representing about 33% of our order backlog. This led to total cash balance, including other financial assets, of EUR 339 million. Out of this, EUR 200 million were invested into funds following a very conservative diversification approach.
Just a quick word on our free cash flow on the next slide before I turn back to Felix. Free Cash Flow in the third quarter was negative EUR 7 million, which was up 61% compared to last year's level. With that, let me hand you back over to Felix. Felix?
Thank you, Christian. Before giving you our updated view on the outlook for the remainder of the year, I would like to share some highlights of our market development. The order momentum in most of our addressed end markets remains very healthy. In the area of power electronics based on the material system of Gallium Nitride and Silicon Carbide, the momentum continues to be strong, in particular for our Silicon Carbide technology solutions. Here we can report very encouraging figures for this quarter, underlining that our strategy for our Silicon Carbide business is unfolding very well. We believe that our recently launched G10-SiC is the right tool at the right time. This fully automated multi wafer batch tool processes 9 6-inch wafers or 6 8-inch wafers per process run, enabling our customers to produce their wafers at the lowest cost in the market today.
Today, most customers are still running the main volume of their production lines on 6-inch wafer size. Nearly all of them have a well-defined roadmap towards 8-inch prepared. Our new tool, G10-SiC, addresses this market need and we are more than happy with the customer feedback and the orders we have received within the first quarter of the launch. At this point in time, we are demonstrating the new system to further customers in order to convince market participants who are not yet using our system. The main driver for silicon carbide power devices remains electromobility, with use cases in the main inverter, the onboard charger, and in fast charging pools on the roadside.
In addition, we see more and more customers investigate higher voltage Silicon Carbide devices at 3 kilovolt or 10 kilovolt, which are going into the very high power applications in green electricity generation, such as large wind and large solar power plants. In the market for Gallium Nitride power, we observe continued strong momentum. This segment was the second-largest contributor to order intake in Q3 2022. We continue to see additional customers in the area of power electronics, enhancing their portfolio by GaN power devices. This is driven to a large part by the tremendous potential of GaN power devices to increase the efficiency of energy conversion. The combination of rising energy prices and increasing awareness for energy savings and going to net zero continues to be the main driver here.
In the area of MicroLEDs, we see more and more players from the display industry, from the LED industry, and from consumer electronics starting projects. We expect to ship first volume orders in 2023 into one or two application segments, with other segments following later stage. Eventually, we will see MicroLED displays penetrate the complete display space ranging from TVs, notebooks or smartphones, all the way to automotive and large signage displays. Finally, I would like to give you an update on the portfolio renewal that we are working on for a while. The G10-SiC silicon carbide is the first member of the new series family that we are launching. Also for GaN power electronics and for gallium arsenide lasers and MicroLED, we have new family members in the making.
We are planning to launch both of them in the first half of 2023. Today, these products are in the validation at multiple beta customers, and both of them deliver very promising results in all the target applications that we have in mind. With that, let me now give you the update on our full-year guidance for 2022 on Slide six. As indicated before, the shift of some tool shipments from Q3 to Q4 2022 will lead to exceptionally high shipments in the last quarter of this year, resulting in a record level of quarterly revenues. Based on this and the strong customer demand, we upgrade our original full-year 2022 guidance. Orders are now expected to come in between EUR 540 million and EUR 600 million from previously EUR 520 million to EUR 580 million.
We leave our revenue expectation unchanged at a range between EUR 450 million-EUR 500 million. The 2022 gross margin we expect to be around 42% compared to 41% before. We expect our EBIT margin to be now between 22%-24% from 21%-23% before. As before, these expectations for 2022 are subject to the provision that the challenges of the current environment will not have significant impact on the development of our business. With that, I'll pass it back to Guido before we take questions.
Thank you very much, Felix and Christian. Operator, we will now take questions, please.
Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press nine and star on your telephone keypad. In case you wish to withdraw your question, please press nine and star again. Please press nine and star to register for a question. The first question comes from Michael Kuhn from Deutsche Bank.
Good afternoon, gentlemen. A few questions on a complex topic, and that is the delivery and sales delays that you saw in the first quarter. Firstly, you mentioned some customer-
Oh, we just lost the connection. Just a moment, please. We don't have him in the line anymore. I'll suggest we go to the next question now. Just a second. Next up is Olivia Honychurch from Jefferies.
Hi. Thank you for taking the question. Two from me, if that's okay. Firstly, on the Silicon Carbide side, it sounds like you're making very good traction here, and that's obviously partly being led by your new tool. You said that a large part of your order intake is coming from this segment. Can I ask, is that coming mostly from existing customers like Wolfspeed and your second big customer here? Or have you been able to sign up new customers just for your Silicon Carbide tool in the quarter? I've got a follow-up as well.
Thank you very much. A very good question. Yes. In fact, with our new silicon carbide tools, we have been able to register orders both from existing customers and new customers. It's a good and solid mix. We can confirm that with this tool. But overall, we continue to make inroads in the silicon carbide market by broadening and further expanding our customer base. That makes us very positive also for further growth out of this segment.
Great. That's good to hear on the new customer side. I mean, can you give us any color on who those customers might be in terms of geography or potential size or how they could fare in terms of, you know, order tools, and size versus your existing customers on silicon carbide?
The new customers are very, very broad in geography. Some is in Europe, some is in Korea, some is in Taiwan, some is in China, some is in the U.S. We are making good progress. I would say worldwide.
Okay, that's good to hear. Thank you. Finally, my second question was on the export licenses. This may have been what the previous question was gonna be about. You said that you didn't have these in time for the end of Q3. Can I ask if you received them since the end of the quarter? And if not, then when would you expect those to come through? I guess separately as a follow on from that, what risk is there that these issues keep popping up and that in future quarters you see shipment delays coming through because of export license issues?
Thank you. Very good question. No, we have not received the particular export licenses that were the root cause for the push out from Q3 into Q4. They have not arrived yet. However, we expect them to come, yeah, in the next weeks. Don't know when exactly it's gonna be. Also relating to your question, is there risk of further push out? Excuse me, please. This is what we have reflected in the lower end of our order guidance, which we have not increased, but in our revenue guidance, which we have not increased, yeah, as we might have, in order to fully sort of say, reflect that risk. Yeah. The pattern is that we see that export licenses these days take a bit longer.
One of the root causes is that we see that the authorities are very busy. They also have been tasked with additional topics such as distributing funding in the sector of green energy and so on. It's a capacity and bandwidth topic, one of them. Other topics is a deeper scrutiny that we all see and observed on individual customers, and that is what we have reflected. We don't see an overall risk here, but it's a timing topic that needs to be taken into account, and we have done that in full. It's fully reflected in our numbers.
Great. That makes sense. Thank you.
Now we have, Michael Kuhn from Deutsche Bank back in the line.
Yes, good afternoon. Sorry, the line collapsed. As a follow-up on the export license you just spoke about it. Do you expect those, let's say, granting bottlenecks to be solved at some point? Let's say more civil servants working on the topic? Could that be something permanent? In that context, obviously the U.S. is tightening rules of technology shipments to China. Do you see an impact on your business currently or medium term? Do you see any pattern changes in that area? Maybe on the customs and related delays, again, I'm not sure whether this was answered already.
Is that more technical reasons or what was the reason for those delays? Thank you.
Let me try to take your question one by one. I think the first question is whether we expect that the bottlenecks will be solved at some point. I think what I mentioned before is that we understand that additional tasks have been put on the authorities. I don't know what the plans of the government are to start it up. I think we are preparing now for the topic to remain for a while. At some point we will get the licenses that we have now been waiting for. We will wait for others. I think it's a manageable topic. It's just a lead time topic that we will take into account.
We don't expect here a fundamental issue or like a substantial topic. That's my comment to the first one. The second question you're relating is with respect to the new U.S. regulation. We have, of course, looked into these new U.S. regulations in all depths and all detail. We did that actually with support of a very experienced U.S. subject matter experts to make sure that the conclusions we are drawing is correct. It's very clear based on that that these rules and regulations are targeting the segments of AI and supercomputing, not the segment we are in. Our market segment is not affected. Even if we were a U.S.-based company, we would not have any effects or rules on this one.
Also, we have checked none of our active customers is on this expanded entity list. Hence, we do not expect, and also it does not have any implications on our supply chains, yeah, for U.S.-based parts that of course we are using some of them in our tools. We do not see that this changes our current business behavior. Does that address your question?
It does indeed. On the customer related push out or however you wanna phrase it.
Yeah. On the customer related push-outs, we had the effect that in one particular market segment, this was the segment or consumer driven segment of red, orange, yellow LEDs. We had some customers that push out orders, which was of course due to the overall weakening in this market segment, yeah. That was the reason for the customer topic on this one. We do not expect that that's gonna go around across the whole market.
All right. Maybe one more question on the more financial side. You've obviously built up quite a lot of inventory over the past nine months. Can you quantify roughly what amount of working capital relief you expect for the fourth quarter?
Yes. Good question here. I cannot give you the exact number, but we surely expect our inventories to go back to just the run rate we had before, which is this buildup here of inventory in the quarter is purely driven by this push of shipments from Q3 to Q4. It's also correlating with the received down payments. That will be basically resolved by the end of the year. We are preparing, as we said before, for our relationships, the record high shipments in the fourth quarter. I think at the end of the fourth quarter, a tremendous amount of this inventory will leave our company and convert into revenues. Very clear. Absolutely.
Great. Thank you. Very last question promised on the MicroLED side. If I understood you correctly, recent business was not just about your big launch customer, but also other customers, but that is not yet volume business. Is that correct?
Yes. Thank you very much. We see the market at large preparing for the MicroLED topic. We are currently working with a very large number of customers together. We see interest both coming from display makers, from people who were formerly engaged in LEDs, but even also the very big consumer electronic giants. Everybody is working currently on MicroLEDs. As you rightfully say, the majority of these players still in the stage of development. Some of them pilot line production, one of them already preparing now for a volume ramp next year. The others I would say in a slightly earlier stage.
Perfect. Many thanks.
The next question comes from David O'Connor from BNP Paribas.
Great, good morning. Good afternoon, and thanks for taking my question. Maybe firstly, just a clarification on the license. Can you, Felix, just confirm it's the German government that you're seeking this license from, this export license, and to which geography are you shipping these tools into?
Okay. Yes. Let me clarify this. In fact, we need to apply for export licenses for all shipments which are going outside of Europe, outside of the United States and outside of Japan. That means, in other words, we need to apply for shipments which go into big semiconductor markets such as Taiwan, Korea, China, and so on and so forth. All these require an export license. This is a vast majority of our revenues that goes through an export license. Yeah. This is also the reason why these delays that we have experienced now had a visible effect in the P&L. However, we don't expect this as an overall issue.
Very clear. Thanks for that. Maybe as a follow-up question, on the MicroLED side, can you talk to the intensity of discussions with the potential MicroLED customers? You have one that you've outlined before is preparing for volume product. What's kind of the delta there in terms of timing versus kind of the type of discussions you're having with other customers? That would be helpful. Also if you could tell us the percentage of MicroLED orders, I think that'd be useful. Thank you.
I'm not sure whether I got your question in full. With one customer, we are preparing for a volume ramp or volume shipments of AIXTRON tools in the year of 2023. This is also what we had indicated at an earlier point in time. With other customers, we are working on different market segments, different application segments, which may come at a later stage. We don't know exactly whether this is towards the end of 2023 or in 2024. This depends largely on the technical progress that our customers are making. I could not give an exact timing at this stage.
Okay. Understood.
I think the second part of the question was on the share of MicroLED. Let me have a look on that one. Let me look at my data, what I have here, whether I'm able to get that out for you. I think for the full year of 2022 MicroLEDs will be somewhere in a double-digit percentage range for us of our share of revenues. Maybe around 15% for the full year 2022.
Thank you. That's very helpful.
Next up is Jürgen Wagner from Stifel.
Good afternoon. Thank you. Actually, on silicon carbide, two more questions. Your new machine, how should we model your market share, your equipment market share next year and longer term, I mean, silicon carbide? What can you say on Wolfspeed and their yield issues? Do you see any impact on your equipment rollout with them? Another one on your order backlog. You mentioned EUR 369 million. How much of that would you consider as being exposed to cyclical risks or the pushouts you refer to with your red, orange, yellow customers, and last one, the tax rate keeps falling or going down. What should we model for Q4? Thank you.
There was a number of questions. Let me take them one by one.
Yeah, sorry.
That's okay. So the Silicon Carbide market share, I think we have a good chance of next year of approaching somewhere around 50% market share in Silicon Carbide. I think it remains to be seen whether we are slightly below or slightly above this number. I haven't looked at the most recent data, but very clearly, we make very good progress in Silicon Carbide to give you a rough indication. Yeah. The second question you asked was relating to Wolfspeed, who published their results yesterday. I cannot comment on the topics that they are experiencing in their substrate production or wafer-making steps. This is a step which is not related to our equipment, so I don't have any insight on that one and can't comment on that one.
Okay.
Yeah. The last question I understood was that you were asking which part of our backlog is exposed to the red, orange, yellow, yeah, to the market segment, which was experiencing some disturbance. This is a very minor share. I don't have the exact numbers, but it's. I would call it on the grand scheme of things, it would be close to negligible.
Okay. The others, you don't see any cyclical risk?
We don't see any cyclical risk. No, in fact, this is a very good question. We do see that the customers on the power electronic side, and we know power electronics, both gallium nitride and silicon carbide, is continuing their investments. This is the confirmations we also hear from our customers, despite the overall economic situation, simply because there is such a high demand now driven by the electrification of everything. Yeah, electrification of mobility, yeah, electric vehicles, but also by the drive for energy efficiency, which is the main driving force behind gallium nitride. Yeah. We expect these trends to continue.
Okay. The final one was on the tax rate in Q4.
Yeah, that one I would take, as we've recommended in the past, yeah. I would recommend utilizing 15% tax rate that accounts for the utilization of tax loss carry forwards. It does not include changes in deferred tax assets. That's anyway very difficult to predict. Yeah. That's what I would recommend you use for your models.
Okay. Yeah. Thanks. Thanks a lot.
The next question comes from Martin Marandon-Carlhian from Oddo BHF.
Yes. Thank you for taking my question. Just a clarification, sorry, on the sales guidance. You said that the lower end of the range reflects the risk of not having the export licenses in time, right? Without that, you probably have guided towards maybe the high end of the range. That's my first question.
Yes. Thank you. Very good question. The high end of the range is achievable if none of the risks is materializing, and the lower end takes into account all potential risks that might be conceivable. Yeah. One risk you just mentioned, this is the risk of export licenses, a timing topic, timing delay topic. The other risk which we have taken into account for the lower end of the revenue guidance is customer pushouts. For the following reason, we see in the area of power electronics that customers are building completely new fabs, yeah, really with big constructions going on. Yeah, entire new steel structures or concrete structures are being erected, yeah.
Due to the overall global supply chain topic, not on our side, but on the customer side, some of these constructions are very well on track. All of them continue, so this has nothing to do with the economy or anything. All of them continue. We do see that some customers have some challenges with their project plans, and it could be that one or two of these fabs may experience a delay of one or two months, and some tools move from December to January or from December to February. This risk we also have included in the lower end of the guidance. This does not affect the overall trend, but it's something that we have taken into account.
Therefore, at this point of the year, we have an unusually large range of revenue guidance.
Okay. Very clear. On that topic, you know, we saw Wolfspeed warn yesterday on supply chain issues. Is that related to what you said on customer push-out and supply chain constraints?
Well, I cannot comment on the detail of Wolfspeed.
Yeah.
Yeah. The reading, the understanding I got from reading the transcripts myself as a third party, so to say, is that this has to do with technological topics in their production process. If my understanding and my interpretation from what I read is correct, then we are completely independent and not affected with that.
Okay. Very clear. Just one last question. Silicon Carbide was very strong this quarter. Do you expect the mix to, let's say, Silicon Carbide to be higher than Gallium Nitride orders in the next few quarters, in the next few years? The mix to evolve a little bit?
I think both of these materials will continue to be very strong. I don't have exact numbers ahead of me or in front of me that I could say the one is stronger than the other. This remains to be seen.
Yeah. Thank you very much.
The next question comes from Lee Meyer from Lord Abbett.
Hi. I have two questions. The first question is, when did you first become aware of the export license issue, which would possibly impair or delay your shipments in the quarter? Why did you choose to wait until now to sort of communicate this to the market? That's my first question. I have a follow on.
Well, as I mentioned before, we are obtaining export licenses for the majority of our business. It is not new that there has been delays with some topics. Yeah. I think if you have followed us, you will have seen that also in past quarters over the last years, that this happens once in a while. Therefore, we have not seen any need to communicate this to the market, especially as we are very confident that we will stay within our overall guidance, which we have reconfirmed and even increased.
Okay. All right. Understood. Then just in terms of these new responsibilities that you talked about, the authorities being given additional tasks as you stated, why do you think these additional tasks are arriving now? Is there a change in the overall climate that's sort of sympathetic to what's coming out of the States? Why the additional tasks now?
I think you need to ask the decision-makers within the government who will make their top-down allocations. Yeah. This is beyond what we can say. We can only pass on here to this group of what we have been told by the counterparts with whom we are working closely together, who have signaled to us that there is additional work within the authorities which is consuming bandwidth and who have indicated to us, "Hey, AIXTRON, we will have less bandwidth available for all goods being exported out of Germany." That means, with the same team size, having more work to be done, yeah, that means you may need to wait a little longer once in a while. That's all I can tell you. That's all information I have.
Okay. Understood. Thank you.
The next question comes from Olivia Honychurch from Jefferies.
Hi. Thanks for taking another question. Just on this new family of tools, the new portfolio that you mentioned, Felix, can you give us an idea of what the impact would be there on the gross margins for the group? It sounds like it'll be incrementally positive, but just wondering if, you know, you've previously said and that you'd expect your group gross margins to get to about 45% in the medium term. Does that guidance already take into account this new portfolio of tools, or would you look to upgrade that outlook given potentially incrementally positive impacts from the new portfolio? Thank you.
Yeah. Thank you very much. A very good question. We in fact expect that the growth margin of the group will gradually improve as our new portfolio elements will take more and more share of our total revenues. This comes simply from the point that the new product into which we have invested a tremendous amount of time, effort, and R&D come along with much higher productivity than the previous generation, also with better uniformities, better performance of the individual products. That, of course, then also reflected in the cost margins of each of the individual products. Yeah. For sure, the R&D investment needs to pay off at some point. Yeah. As for the timing, which you're asking for, I don't have a financial model ahead of me that I could tell you.
This largely also depends how fast the new portfolio elements will take over share of revenue. As we have seen in the silicon carbide, which we have launched this quarter, there was a very positive start. The other members of the family we will be launching in the first half of 2023. I think we can expect throughout 2023 them to take a relevant share of the group revenues, then much more unfolding throughout 2024. When that is coming, yes, for sure the cost margins will increase. Nevertheless, I would not want to quantify that effect today here in this call.
Okay. That's fair enough. A lot.
Okay. Thank you very much to all the listeners and questions asked us. With that, we would close today's call. Please contact us at IR if you have any remaining questions. We're happy to discuss. You'll find our contact data in results presentation. Thank you very much. All stay safe. Bye-bye.
The conference is no longer being recorded.