Good afternoon, ladies and gentlemen, and welcome to AIXTRON's first half and second quarter 2019 results conference call. Please note that today's call is being recorded. Let me now hand over to Mr. Guido Pickert, VP of IR and Corporate Communications at AIXTRON, for opening remarks and introductions.
Thank you, operator. Let me start by welcoming you all to AIXTRON's presentation of our H1 and Q2 2019 results. I'd like to welcome our Executive Board, represented by Dr. Felix Grawert and Dr. Bernd Schulte, as well as our VP of Finance and Administration, Charles Russell. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or broadcast without express permission. Your participation in this call implies your consent to this recording. As with previous results conference calls, I trust that all participants have our results presentation slides, page two of which contains the usual safe harbor statement. I would like to point out that this applies to all the conference call.
You may also wish to have a look at our latest IR master presentation, which includes additional information on AIXTRON's markets and its technologies, and is available on our website as well. This call is not being immediately presented via webcast or any other medium. 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 Dr. Bernd Schulte for opening remarks. Bernd?
Many thanks, Guido, and a warm welcome from my side as well. As usual, I will give you an overview of AIXTRON's key developments in the first half of 2019. Charles Russell will go into more detail on the financials. This will be followed by Felix Grawert, who will give you an update on OLED and power electronics, as well as a wrap-up. In Q2, revenues came in at EUR 63.3 million, which meant that we generated EUR 132 million in the first half of the year, which was substantially better than the EUR 118 million we generated in the same period last year. We also generated solid gross margins of 40% in the first half of the year, with EBIT totaling to roughly EUR 19 million and a net income of roughly EUR 60 million.
These results and our EUR 110 million backlog give us a good basis for the rest of the year. As a result, we can confirm our full-year guidance, which we gave you earlier in the year. With our ongoing cost reduction measures, we expect the product mix going forward and the positive U.S. dollar exchange rate, we now expect to be at the end of the year at the upper end of our margin guidance. We also had a second quarter, which was a reflection of the expected reluctance by some of our customers, particularly in the area of optoelectronics, to invest in new production capacities. On top, this was influenced by geopolitical economics, such as the U.S. ban towards Huawei, a major global player in telecommunication hardware, including network devices or mobile phones.
With that, Q2 order intake was comparatively low at just under EUR 45 million, with a major contribution by power electronics. We see inquiry levels suggesting an order pickup in the second half of the year, in particular from Asia. Despite the weak market environment in the first half, which has been caused by the situation mentioned earlier, we still see three strong growth drivers in the areas of lasers, power electronics and specialty LEDs. It is important to note that our equipment enables the development and production of key end products and components for major global megatrends, such as the next-generation 5G mobile networks, 3D sensing for mobile phones, and power electronics for electric vehicles and renewables, as well as next-generation micro LED displays. At this point, let me now hand over to Charles for a more detailed overview of the first half 2019 numbers.
Thanks, Bernd, and hello to everyone. Starting on slide four, our income statement. Total revenues for Q2 2019 were EUR 63 million, compared with EUR 69 million in the previous quarter. Gross margin was 41% in the quarter, compared with 39% in Q1. The continuing strong dollar added just under one percentage point to the improved margin, with the remainder coming from a better sales mix, which included a lower proportion of shipments for LED compared with Q1. Operating expenses in the quarter were EUR 16.6 million, slightly below Q1 EUR 17 million. G&A expense in the quarter returned to more normal levels. Q1 included reduced project-related costs. R&D expense of EUR 12.5 million was similar to the previous quarter, with small reductions coming from lower project material spend. Other income was mainly R&D grant income and exchange gains. Overall, EBIT for Q2 was EUR 9.3 million, compared with EUR 9.7 million in Q1.
Net profit for Q2 was EUR 7.3 million, compared with EUR 8.5 million in Q1. The tax expense for the quarter includes a routine tax adjustment of EUR 0.7 million.
We continue to expect the effective tax rate for 2019 to be in the range 15%-20% for the group. Turning to the balance sheet on the next slide. Inventories of EUR 82 million include around EUR 10 million of prototype systems, which include systems at customer sites. Receivables stand at EUR 28 million, which is 32 days sales outstanding. Advanced payments from customers are EUR 39 million, down from EUR 63 million at the end of 2018. The change reflects the low order intake in the first half of the year. Advanced payments of 35% of the order backlog. Moving to slide six, which shows our cash flow statement. We had a healthy free cash flow of EUR 13 million in the quarter, and we expect this to continue into second half to meet our guidance of a positive free cash flow between EUR 15 million and EUR 25 million.
We ended the quarter with EUR 259 million in cash. Let me hand you over to Felix.
Thank you, Charles. I would like to give you some perspective on recent developments in OLED and power electronics before concluding with the outlook for the rest of the year. Turning to the update on our development project on slide seven. With regards to OLED, our Gen2 has been installed in a customer's facility earlier this year. The tool is jointly operated by a team of engineers of our customer and of our subsidiary, APEVA. The tool is running stable and its process performance is currently being fine-tuned. It is undergoing an in-depth evaluation with respect to OVPD technology and the performance of OLED produced on that tool. As a result, we are making good progress in the qualification of our technology. In the power electronics area, we continue to gain momentum. In gallium nitride power electronics, we have a solid and growing customer base.
We have been able to win new customers with orders both driven by the 5G build-up in GaN RF and from capacity expansion in GaN power markets. In silicon carbide, we make good progress with our fully automated high throughput system. We have obtained orders for this tool from several customers already, and performance demonstrations to additional customers have been scheduled. Market feedback is very positive, which gives us confidence that we are on track to successfully address the multi-billion EUR market opportunity in power electronics. Let me now come to our outlook for 2019 on slide eight. We have had a slow start to 2019 in terms of orders. We are seeing a broad customer interest in our technology offerings, and especially our solutions around lasers for telecom and 3D sensors, as well as for power electronics.
Despite the weak market backdrop, we can reconfirm our guidance for 2019 that we initially issued in February and confirmed in April. We remain confident that we can achieve our goal of between EUR 220 million and EUR 260 million in new orders for 2019, with an expected increase in demand, particularly from Asia. However, we do have to recognize that there remains an element of risk around those anticipated orders given the current environment. We expect revenues to be between EUR 260 million and EUR 290 million. We now expect gross margin to be around 40% of revenue and EBIT margin to be around 13% of revenue, both being at the top of the originally guided ranges. Additionally, we expect to generate between EUR 15 million and EUR 25 million of free cash flow this year.
Finally, let me assure you that although there is weakness in some of our markets, we have an excellent product portfolio with growing interest from a broad range of customers, all of which give us confidence around our strategy, business model, and the growth opportunities in front of us. With that, I pass it back to Guido before we take questions.
Thank you very much, Felix and Charles, for your speech. We will now take questions. Operator, please open the Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press nine followed by the star key on your telephone keypad. If you wish to withdraw your question, please press nine star again. Please press nine star now if you'd like to raise a question. The first question comes from Andrew Gardiner, calling from Barclays. Over to you.
Good afternoon, gentlemen. Thanks for taking the question. I just had one on the points you were making there in terms of the order outlook, Felix. You mentioned you're sticking with the guidance for €220 to €260 million in new orders for 2019. The increase in demand that you're seeing from Asia, can you give us any sense as to what segments that's coming in, LED, optronics? I can understand sort of customer interest in the technology, but what's giving you the conviction that they're going to come through and indeed place the orders given the backdrop that you've talked about? Are those discussions particularly advanced and you're close to closing them? Trying to sort of gauge the level of conviction around that. Thank you.
Yeah, Andrew, this is Bernd. Let me give you an answer to your question. What gives us the confidence is indeed the discussions we're having with customers with quotations, and basically ongoing negotiations about contracts. That gives us the confidence. What is the driver? Well, we have said clearly that the reason for the reduced order intake in the second quarter has been really the backlog in optoelectronics, mainly in 3D sensing, but also some telecommunications related. This seems to be now coming back, in particular some countries in Asia, mainly China, Taiwan.
Thanks very much.
Thank you. If anybody else would like to ask a question, please press nine star now. The next question for today comes from Basil Tater, calling from Bankhaus Lampe.
Yeah, hi. Thank you for taking my questions. First one would be on the VCSEL business you mentioned in Asia. As far as I see in Q2, your VCSEL shipments have increased QOQ. The question is how much capacity is really needed there still for the H2 ramp up or higher penetration of 3D sensing in smartphones? Are there any other points which needs to be considered here?
Basil, Bernd speaking. I think the main driver for basically moderate return of demand for VCSEL tools really comes still from the cell phone market. I think it's expected that we will see the Android camp really now in 2020 coming in the use of 3D sensing devices, either for Face ID, but also maybe on the world side. Also it's speculated there will be a new model from Apple, which also offers more 3D sensing applications. I think the supply chain is starting to preparing for this potential additional demand.
Would you say that the over capacities in VCSEL are now fully digested?
This is hard to say on a global base. I think it is really depending on customer to customer. There might be customers still having some overcapacity and others who have a different ramp strategy maybe still need additional capacity.
Okay, thanks. On a follow-up on the power business. The shipments in Q2 were still maybe one tool more than in Q1. I guess it's more in the backlog, right? The power business. Any chance to get a split for the backlog in terms of the different applications and products like you do that for the sales?
Well, I don't have the numbers for the backlog for you, but in Q2, the power order intake was very strong. It was close to 50% of the order intake. We clearly see that there's a rising and a growing demand on the power side.
A brief update on your tool. It is supposed to be in the market end of this year, right? Is it still on track?
You mean the silicon carbide tool, correct?
Yeah.
Yes. The Silicon carbide activities are fully on track. We have tools for beta testing at the ground at several customers. We're making good progress. We have received additional firm orders from further customers beyond the betas, and our lab is very busy in doing demos for even additional customers. We are fully on track.
Okay. I don't know if you can give any color around the recovery you expect in the orders for the second half of the year. What type of recovery would that be? Is it more the 70+ quarterly run rate we have seen in 2017, or is it rather 60+ range in 2017? Any insights there would be really very helpful.
Basil, certainly the numbers have to support our guidance figure, which is to EUR 20 to EUR 60, and I think much more detail, I think we are not prepared here now to give.
Okay. Final one on the other operating income. It's FX and plus the subsidies you receive. H1 was already above the level what we have seen for the full year of 2017. Any split there what drives exactly that between FX and subsidies?
No, not really. I think it's an increase in both.
Okay. Good. Thank you very much.
Thank you. If you've not already done so, please press nine star if you'd like to raise a question. Next, we have Uwe Schupp calling from Deutsche Bank. Over to you.
Yeah. Thank you, and a very good afternoon to you all. Just two questions for me. Firstly, on the trade war, and really rephrasing a question from Andrew earlier. The potential implications for you here. If I remember back at the conferences and also road shows that you did in May and June timeframe, you were actually pretty cautious back then on the business development because you saw some nervousness on the back of the Huawei ban. Today you come out and say basically that business should be picking up materially from here, whether it will be 60 or 80, that remains to be seen. Is it correct to say that the nervousness has vanished mostly and you are still, or you are by now a net beneficiary, maybe even, from this whole trade conflict because China is building up a known supply chain?
Then secondly, just for Felix. Did I get you correctly? Power was 50%, that's 50, of the mix in Q2. Would be interested if that is not related to the new silicon carbide tool. It must be related to gallium nitride. Then the follow-up would be whether that is for some initial fast charging business that one of the U.S. semiconductor companies has been talking about, apparently potentially supplying to a major smartphone launch in this coming autumn. Thank you.
Yeah, Uwe. This is Bernd speaking. I think what is potentially happening is that due to the political stress which is going on, that there are now more interest inside of China to develop a local supply chain. Certainly, this doesn't come overnight. This takes time. I think it's not unlikely that this is going to happen. On the other side, we've seen definitely increasing demand for telecom laser tools as well as VCSEL tools from that region, I would say from greater China. Whether this has a one-to-one relation, we certainly don't know. Everybody can draw his own conclusion. We're seeing definitely increase in quotation activities and customer discussion and contract negotiations from that area.
Mm-hmm. With that, let me come to the second part of your question relating to the power electronics. For that 50% of the order intake, power electronics was a mixture of different factors. First of all, it is a combination of orders relating to the established gallium nitride tool, but also orders for the new silicon carbide automated tool. Within gallium nitride, once again, a diverse mix. Part of that related to the 5G build-out. Again, very diverse from multiple regions around the world. The other part within the GaN related to power electronics and also that diverse picture, some repeat customers, some new customers, some on high voltage, some on low voltage. I would put it's a relatively broad diversified takeup or pickup of the order intake rather than a one particular, one specific segment driver here.
Just a brief follow-up, Felix, if I may. On the gallium nitride low power. In your pipeline, do you see potentially bigger orders coming from the fast charging opportunity?
Not from a particular single opportunity. It's rather a broad trend across the entire market.
Very clear. Thank you.
Thank you. The next question comes from Harald Schnitzer, calling from DZ Bank. Over to you.
Yes, hello. I've got a question on the OLED project. How has it developed since Q1 in terms of likelihood that you will receive the order in the second half maybe? Secondly, on the silicon carbide, you mentioned, Dr. Grawert, that you would have some new orders from customers. Are there completely new customers for AIXTRON? Thank you.
Thank you for the question. On the OLED topic first. Our tool is currently being operated by our engineers and the engineers of our customer. They are together executing test runs. They are producing OLEDs in a small laboratory format on the tool to complete OLED devices, which are then being rigorously tested for specifications like brightness, lifetime, color saturation, all types of technical parameters. We expect that evaluation to be lasting throughout summer, early fall. Once those tests have been fully completed and all the technical and engineering results of those tests are available, because testing always means also some fine-tuning and some optimization of finding the right set point of such a brand-new tool. When that is completed, we will really know about the technology potential, and then we can talk about the customer order.
In a nutshell, at this point in time, it would be too early to comment or to give any directional input, but I think we are well on track with respect to executing the testing phase. Maybe that gives you an idea what the status of that project is. With that being said, I would like to turn over to the silicon carbide topic. Yes, in fact, some of the orders that I was mentioning come from completely new customers. Yeah. For AIXTRON and of course, also for silicon carbide, we have been able to broaden our customer base here, which is a very positive result.
Thank you.
Thank you. The next question comes from Janardan Menon, calling from Liberum. Over to you.
Hi. Good afternoon. Thanks for taking the question. I just want clarification on the silicon carbide. You said you've recorded some orders for customers beyond the beta tools. Are these also for additional beta tools, or have you taken orders for a production tool at this stage already?
Some orders could be on beta tools, but some orders about the tools and the automation capability is then later to be proven once the betas are completed.
Okay. Just to know how we can sort of figure out how your progression of silicon carbide orders will go through. Is it that you're getting one or two orders now, but once the larger silicon carbide chip companies out there finish their qualification, you will see a substantial pickup in orders, and that could be by around Q4? Is that the way we should think about this?
I would not want to give an exact timing on this. It's clear that all the customers are first getting one tool on their shop floor, be it in form of a beta, be it in form of a firm order. The tool is then being brought into all the full specifications, being tested. The tool is being run for a certain period of time by the customer, where the customer is gaining full experience what the tool can deliver, not only in the laboratory test environment, but really in a regular high-volume production environment. Once that phase within our customer is completed, then we are targeting to expect larger and volume orders from the customer. I think if you add these steps, I think some may be there Q4, others may be in 2020. It really depends on the high-volume qualification process of the customer.
Understood. Just going to 3D sensing, ams, in their results, talked about a strong momentum that they're seeing from the Android side on 3D sensing, both front and wall facing, they were talking about. I was just wondering, so far the customer base of 3D sensing, especially at Apple, has been quite consolidated. IQE has been a major customer of yours as well. Are you seeing a fragmentation of that in the Android side? Are you seeing many Chinese, Taiwanese companies get into that market, or is it remaining quite consolidated even as the Android momentum picks up? I have a last follow-up, if I may.
I don't think we can call this fragmented. I think the players here providing EPI for the 3D sensing applications are the known suspects, and you can imagine that most of them are external customers. I think the customer base has not changed significantly, in particular for the well-known supply chains over the last 12 months. However, we've seen certainly new players, we're still seeing new players starting with developing discrete products in terms of EPI, particular in Asia, particular in China. I would say for the time being, and when we speak about potential product lengths of next year, I think it's very likely to be the known suspects.
Got it. My last question is on the OLED side. The date for when we might see an order for a larger GenX system has slipped a little over the last year or so. There was an expectation that that could have come in earlier. You're now saying before the end of the year. Can you give us some feel for where you are in that process? Is there an ongoing negotiation on the size of the machine, and the price which can be paid, et cetera, that has already started? Or is that something that is yet to start at this point in time, and it'll depend on the ongoing testing that the customer is indulging in?
The latter is correct. As I mentioned, it's first about evaluating and completing the technical performance evaluation and fully understanding the capabilities of the tool. If that is positive, after that, it comes to the discussion about the customer. Yeah. It's true, our overall program, as you know, has been a bit delayed. Now we are well on track. Nevertheless, what exactly the date for that is, it's not clear. It's really the steps mentioned, after that, the next phase is customer discussion negotiation will start.
Understood. Thank you very much.
Thank you. The next question comes from Charlotte Friedrichs, calling from Berenberg. Over to you.
Hello. Just one follow-up. I think we've covered most of my questions by now. Could you tell us how much an R&D expenditure you had in the second quarter, towards APEVA and how you see this going forward also? As you said, you're going through the testing phase, you may receive the order. How should we think about that? Thank you.
Yeah. Thank you. No problem. As you know, in the last years, in 2018, the OLED activity had a bottom-line impact of about EUR 25 million for us. As we commented earlier, in 2019, we expect the bottom-line impact of the OLED activity to be less. We would not comment exactly how much that breaks down by individual P&L item, but it will be a little softer of an impact on the P&L. The exact numbers, of course, determine or depend largely on the discussed timing sequence of the technical evaluation, the starting point of a project for the GenX, and therefore it would be too early now to give out exact numbers. The overall trend and big line is intact.
Okay. Thank you. One more question. You said that 50% of the order intake in Q2 was power-related. Could you give us a split, very roughly, of how much of that was GaN and how much of that was the beta and silicon carbide tools?
I don't have the numbers exactly in front.
Very roughly.
judgment, maybe two-third, one-third.
Okay.
50/50, something between that. Something in that range.
Okay. That would be 2/3 GaN, 1/3 silicon carbide. Right?
Somewhere between two-third GaN, one-third SiC, and 50/50. Somewhere in between.
Okay.
Don't have the exact numbers in front of me. Yeah.
Thank you.
Thank you. The next question comes from Malte Schaumann, calling from Warburg Research. Over to you.
Good afternoon. The first one is on carbide again. How long does it take for your customers to tune or qualify their process on your tools? How many months are required before new customers could place more volume, like orders?
It varies very significantly. Yeah. We have some customers who take on a very diligent, very rigorous qualification and quality control approach, where you can say it can be a process of five, six, seven months. Yeah. Very diligent. We also do have some customers who follow a much more aggressive risk-taking approach, running some stress tests within literally a single-digit number of weeks, and then starting to come to tool decisions in order to be an aggressively grab market share. Yeah. It's a very diverse pattern. Yeah. Therefore, if you think about potential orders, follow-up orders, it will be a mixed picture varied by type of customer. Yeah. You can imagine some of the established German automotive supply chain lean much more towards the one side. Other customers, of course, are on the other end of the spectrum.
Okay. Do you see other customers, new customers for your company to be close to also place orders within the next month? Would you expect to maybe have relations to all the major players within a few quarters?
We are in discussion. We are currently in discussion with all the big players of the market, and we are in demonstrations in our laboratory, and it's clearly our target, our objective, to win a major share of this customer base. At this point, we cannot comment yet, because the demos have been outstanding with many of them, which share of them we will eventually win over for our tool.
Okay. Do any of your customers provide some kind of indications for potential ramp schedules, or do you have some kind of idea how potential ramp in 2020 might look like? Will it be one by one or the potential for multiple orders or multi-tool orders?
Sure, it would be too early to discuss here at this stage. Yeah. The technical mass production experience of our customers comes first, and then we enter the ramp phase. This would be too early to discuss.
Yeah, sure. Okay. Thanks.
Well, thank you. Thank you, everyone. This would conclude today's call. Thanks for your interest and your participation in this call. You know where to find us and me, in case you still have any questions. For that, thank you all, and bye-bye.