Morning. Good afternoon, ladies and gentlemen, and welcome to AIXTRON's Q1 2019 Results Conference Call. Please note that today's call is being recorded. I'll now hand you over to Mr. Guido Pickert, VP of Investor Relations 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 Q1 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. It cannot be recorded or rebroadcast 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 throughout the conference call.
You may also wish to have a look at our latest IR master presentation, which includes additional information on AIXTRON's market and its technology, and is available on our website as well. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or a 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 Q1 2019 before handing over to Charles Russell, who will go through the financials in more detail. This will then be followed by Felix Grawert for an update on some of our important development projects in the record. Q1 2019 beats our expectations for margins and earnings, with a gross margin of 39% and an EBIT margin of 14%. A stronger dollar and the lower product costs as a result of cost-saving measures have supported these figures. Orders, as typically in Europe, have been in line with what we said during our full year 2019 conference call, as it reflects the expected reluctance of customers to invest in the expansions of their production capacities before next generation end product launches have been cleared.
Taking this into account, we confirm our full-year guidance for total orders to be received in a range between EUR 220 million and EUR 260 million. In the shorter-term, we expect a growing demand for laser due to the increasing demand from 3D sensing, security infrastructure, or optical data transmission. In the longer term, we also see the increasing use of LEDs, micro-LEDs, and special LEDs in display and other applications. In addition, we expect an increased use of gallium nitride or silicon carbide-based devices for wireless communication and efficient energy management in automobiles, consumer electronics, and mobile devices. With that said, let me now hand you over to Charles for a more detailed overview of the Q1 2019 financials. Charles?
Thanks, Bernd, hello to everyone. Starting on slide four, our income statement. Total revenues for Q1 2019 were EUR 69 million, compared with EUR 63 million in the same quarter the previous year. Gross margin was 39% in the quarter, compared to 43% in Q1 of 2018. This expected reduction in margin was caused by an increased share of sales for LED applications. A continuing strong dollar was a beneficial effect during the quarter, at least compared with our guidance, which was based on $1.20 to the EUR. Approximately 70% of our sales are in US dollars. Furtherly, reducing product costs have also had a sustainable beneficial effect on our margins. Specifically, we have achieved some significant product cost reductions by sourcing components from different suppliers and also reduced warranty expense by improvements in reliability.
Operating expenses in the quarter were EUR 17 million, slightly below previous quarters because of lower project-related expenses. Selling expenses of EUR 2 million in Q1 2019 were in line with last year on a quarterly basis, as G&A expense and R&D costs were less than previous quarters because of lower project-related expenses. G&A was EUR 4 million in Q1 and R&D EUR 13 million in the same period. The R&D expenses for the OLED activities in Q1 were just over EUR 4 million. R&D costs fluctuate over time depending on the different activities being performed. This is a normal feature of R&D and is not a cost-cutting exercise. Overall, EBIT for Q1 was EUR 9.7 million and net income EUR 8.5 million. Turning to the balance sheet on the next slide. Inventories of EUR 80 million include some prototype power electronic systems, some of which are at customer sites, as well as healthy stockings for debtors.
PP&E increased the capitalization of EUR 3.9 million of leased assets under IFRS 16. Payables have reduced because we paid suppliers for the increased inventory and customer deposits were lower, reflecting the ordering pace in the quarter. Moving to slide six, which shows our cash flow statement. The CapEx is EUR 5.6 million, includes EUR 3.9 million of leased assets. The changes in working capital is what I have already described, then the free cash flow was minus EUR 18 million in Q1. We ended the quarter with EUR 248 million in cash. With that, let me hand you over to Felix.
Thank you, Charles. Before getting to our outlook, let me quickly give you an update on where we stand in our OLED qualification process and in our development process of the new silicon carbide power electronics tool. We completed the installation of our Gen2 pilot production OLED tool within our customer's facilities, as we told you in February. Currently, the tool is being put into operation jointly by the customer and our AIXTRON engineers. This represents another step forward on the way to the qualification of the OVPD technology. In the coming months, the joint operation of the system shall confirm the performance of the technology, and the resulting data will be the base for the customer's decision to order a production-sized chamber during 2019.
In power electronics, we have installed multiple beta systems of our new fully automated High Q+ silicon carbide tool to customers in order to perform beta tests and to qualify our tools as a device manufacturer. At the same time, we are seeing strong interest from all relevant power players in the market for our technology. This makes us very confident that we are on the right path to address the major market opportunity in power electronics lying ahead of us. Now, looking at slide eight, we can confirm our 2019 guidance that we have issued in February. We expect to receive total orders in the range between EUR 220 million and EUR 260 million, which means that we need to report additional orders of EUR 166 million-EUR 260 million on top of what we've reported in Q1 during the remaining three quarters of 2019.
This range considers both the geopolitical and the customer-specific uncertainties, as well as the still unclear magnitude of a possible order in the OLED segment. Revenue are expected to be between EUR 260 million and EUR 290 million. Gross margin and EBIT margin are expected to be between 35%-40% and 8%-15% respectively. Free cash flow for 2019 is expected to be between EUR 15 million and EUR 25 million. We are fully on track to reach the guided levels in all dimensions, also in terms of free cash flow, despite the negative free cash flow value reported in Q1. Please note that these estimates fully include the results and CapEx of AIXTRON, and are based on our budget rate of $1.20 or $1.20 per EUR. With that, I'll pass you back to Guido before we take questions.
Thank you. Thank you, Charles. Operator, we will now take the questions, please.
Ladies and gentlemen, if you would like to ask a question, please press nine, star on your telephone keypad. In case you wish to cancel your question, press nine and star again. Please press nine, star to state your question. Please press nine, star to state your question. The first question comes from Jonathan Mignon from Liberum. Your line is clear.
Yeah. Hi, gentlemen. Thank you for taking my question. I have two questions. One is on your order trends and what you're seeing in the market. I saw your results in the morning, and they sounded a lot more upbeat about how the adoption of 3D sensing is going on in the Android side, and there seems to be an increasing number of models coming out which have 3D sensing for the front and back of the phone. I'm just wondering, given that commentary, how would you compare what you're seeing in the market today versus three months ago, when you gave the guidance for the full year of EUR 220 million to EUR 260 million orders?
Are you feeling I mean, is it a slightly better environment, or would you say that it's pretty much the same and you have not seen any of the sort of improvements that companies like AMD are talking about reflect in your discussions with customers as yet? My second question is on silicon carbide. You said you're in qualification at a number of customers and that there's interest in buying new equipment from them. When can we expect the qualification to be completed? Therefore, when should we expect orders to be placed by these customers for your new machines? Lastly, in your previous guidance for the revenues of EUR 220 million to EUR 260 million, have you factored in any orders from silicon carbide at all? If they will come in, what impact on your order book?
Thank you guys for your questions. Let me try to answer your first question. The current order level and activities in quotation, at the moment, is quite diversified in applications and regions. This is why it's not really fully clear yet how the second half developed. We always mention that the earliest area we see a potential comeback of orders for the 3D sensing markets would be in the second half. With the current view we have on this very diversified view, as I said, in applications and regions, it's difficult to say where the second half will develop in order to say whether we are more at the lower or the higher end of our guidance. It's too early.
Okay. You've not received any inquiries or anything like that coming through the last few months from anything like that?
No, it's still too diversified to see a real movement.
Understood. On the silicon carbide?
Yes. On the silicon carbide, I think there are two questions, right? The first I understood is when the qualification will complete. We do expect the customers to complete the qualification or first customers to complete that qualification throughout 2019. That means when we can expect follow-on orders from customers who have a tool currently in the qualification process. I think that this will be towards Q4 2019, Q1 2020, coming around the winter time. That's for sure, we do have a number of silicon carbide orders already included in our guidance.
Thank you very much.
The next question comes from Uwe Schupp from Deutsche Bank.
Yeah. Welcome. Two questions, please. Let me rephrase the first question from Tamara. Basically, looking at Q1 orders and your guidance for the year, obviously price, you are guiding for an improvement in coming quarters just in order to survive at EBITDA. Is there any basement with support there or is it actually purely based on hope? Secondly, Charles, just on the higher inventory that you alluded to, inventory were up 30% or if not more, year-over-year. What was the Brexit related and what other effects may be included here that we may not be noticing?
Yeah. Thank you, Mr. Schupp, for the question. Speaking about the order intake, first of all, if you multiply our order intake first quarter times four, we're very close to our lower end of the guidance. It means, you're right, we need an increase to achieve the upper end or somewhere in between of the guidance. As I mentioned in the previous call and as I mentioned before, we still see the potential that we see an increase in second half when, for instance, 3D sensing basically has congested the current capacity and needs further increase in outputs and preparation, say, for the growth in the year 2020 and so on. As I said, it's very difficult to be more precise right now.
We're seeing a good activity in quotations at the moment, as I've mentioned, the application in particular to the regions are very diversified in order to see a clear pattern yet.
Thank you.
On the questions about inventory, we have a sort of EUR mid-single digits millions figure of inventory related to Brexit. We have a little bit more than that related to prototypes. Our inventory is there to be built against customer orders, not building onto speculation, if that was the aim of your question.
Also keep in mind, if you look in our guidance and what the Q1 revenue has been, it's clearly a requirement of an increase in revenues in coming quarters. You heard from Felix very clearly the confidence in achieving our guidance, which means that our production needs to prepare this output, which in the end will end in an increased work in progress. Also we're doing increased activities with customers on the qualification of our power electronics tools, which also means we have tools at customers which are still reported in our list.
Yes. Thank you.
The next question comes from Laura Sutcliffe of Berenberg.
Hello. Thank you for taking my question. The first one would be around your expectations for LED orders. You have a larger share of revenues coming from LED in the first quarter, my question would be what the expectations are for Q2. Is there much more to come, or is it pretty much done now with these larger orders? The second question would be around order intake in the first quarter. If you can tell us maybe a little bit what the split here is between end markets. Finally, on the cost side for 2019, do you expect any meaningful changes in your OPEX, or is Q1 pretty much run rate now? Thank you.
Yeah. Let me talk about our expectations in the LED sector, which I mentioned in our annual call, that for 2019, we do not expect significant orders in the field of red, orange, yellow LEDs. This is because we got significant orders in 2018, which shipments we're seeing in this quarter and next quarter. If you look in the application split of our revenue, you see the strong caution of the LED chart. With that capacity getting installed right now, we do not see a continuation of the capacity requirement before the medium term. The view is pretty much unchanged to what we said three months ago, or two months ago, when we gave our full-year figures. For 2019, we do not expect significant orders from that application.
The split in orders, you mentioned orders about Q1 was fairly evenly split between laser device applications as well as power electronics and solar cells. This was basically mainly the split, not really dominated by one of the applications. It really echoes what I mentioned about also the short-term outlook for orders. It's pretty much diversified.
In terms of the OPEX, I think I mentioned that the OPEX fluctuated and that it was quite low for some of the spend in Q1. We do expect it to be a little bit higher in the rest of the year.
Okay, thank you.
The next question is from Jonas Hauser of Bankhaus Lampe.
Yes. Hi, several questions left. One would be regarding your power business. You mentioned some better tools. Can you just give a color if you go back six months, have you added new customers in this space? Can you give a color around SiC and gallium nitride, how these both areas fare into one, and how do you expect them to shape up throughout 2019?
Thank you. I give a comment on the silicon carbide and later on the gallium nitride. In silicon carbide, as mentioned before, we are in the process of bringing out our automated high throughput system with bigger tools for orders for this high throughput system. It is multiple customers that we have scaled the tools. It is existing customers, which we've been serving in the past, and it's also additionally new customers, so to say. We've been able to extend our customer base. Now all these customers and all these qualification programs are running, as mentioned before, throughout the year 2019. As mentioned before, we see broad interest from an even further group of customers in the market. Of course, our expectation, our target is to even further broaden our customer base. That's on the silicon carbide.
Now, let me comment on gallium nitride, the second part of your question. As you know, as we have mentioned previously, we have a good and strong customer base on the gallium nitride power electronics. Most recently, we've seen increased activity, increased demand from customers in the gallium nitride RF, especially preparing for the 5G build-up. Also here, we have seen a number of orders, also broadening the customer base. We expect that trend to continue throughout the year 2019, also 2020. However, of course, as always mentioned, for gallium nitride, it is coming from a relatively small base if we talk about the number and the revenue.
Okay. On your order entry level in Q1, would you say that the EUR 64 million, you were surprised that it was above EUR 60, there is some positive impact of surprises. Do you expect Q1 to be, maybe you guided it like that, would you say Q1 order entry marks a low point for the year, and we should see gradual recovery each quarter, so to say, for the rest of the year?
As I mentioned, it's really quite diversified in applications, that we're seeing ongoing also currently. It's not like that one application dominates really the demand pools right now. I wouldn't say that there were big surprises in order taking Q1. It always also depends when we can book orders for specific customers in areas where we need export licenses. When we get those cleared by the authorities, that sometimes shifts orders from one quarter to the next. That sometimes can be a surprise, simply in the timing, because authorities are not always simple to forecast when you get the application, at least. Within customers and in markets, there were no surprises.
As I mentioned, the development in the second half is still quite difficult because we do not see, let's say, one application really pushing forward to a significant order trend, which we can see as we stand here today.
On seasonality, still do you think there will be on Q2 improvements, or what is your assumption there? Any color on seasonality would be very appreciated.
I think in our business there's no seasonality. It's really driven by the investment into rent, into certain applications. I think Jonathan mentioned it. I can only read what you also read regarding the positive outlook of some players in the 3D sensing market. We are convinced that eventually will also turn into orders for newer systems. When that timing is, strongly depends on the demand, on the yield, on the output of the requirements, et cetera. That's a very complex formula, which is very difficult right now to answer. In general, that's what we keep saying, we are convinced that the 3D sensing market, the demand is intact. I cannot tell you whether this will be Q3, Q4, Q1, Q2, in the time forward. That's very hard to say and depends on many factors.
Fair enough. Thank you. Just one final, if I may. Charles, you mentioned some comments regarding the R&D costs. I'm not sure if I catch form correct with the
Just that R&D costs fluctuate over time, and that the lower level of R&D spend in Q1 is nothing to do with a cost-cutting program.
Let me add to this. The R&D cost is essentially composed of two elements, right? One is personnel costs, which is part of G&A, which is the salary for the people on board are paid out every month. However, the material cost, which also goes through there, depends on how prototypes are being built and how material spent is going through. That is a variable which is fluctuating. It just happened by chance that our quarter number will be lower because a little less material was consumed.
Thank you very much.
If you would like to ask a question, please press nine star on your keypad. The next question is from Mitesh Chalman from Warburg Research.
Good afternoon. The first one I want to ask Martin, first quarter, by the way, the high share of the LED tools. Unless you're seeing maybe a dollar above 115, which I've not seen from the card, would you then say, hey, would we expect to see your gross margin develop, given the guidance range?
As you know, our guidance has been modeled based on the $1 to $1. If you want to plot out what effect the U.S. dollar can have, I think we can relatively easily calculate that if you assume that about 70% of our revenues is based on U.S. dollar. You can make your own assumptions as is a bid on what a potential U.S. dollar rate is likely. To be very clear, everything for the concern or item in the percentage range based on the U.S. dollar rate that we have given, and the rest I think it's just simple calculations which you can make.
Yeah, sure. Okay. On has the qualification process been more or less pretty much on track, whether it's any kind of technical sort of upcoming that might have delayed something, or how do you see general qualification progressing?
Yeah. The qualification progress is on track. The tool that has been installed, as we mentioned before, what's now happening is a number of functional tests of the tools. They're not the very complex tools with the fusion complex functionality. That's how the different functions are being tested and elements and blocks of the tool are being put into operation. When that is completed, then complete bullet tests will be run by the customer, as we have already explained before. Then the customer out of running it and producing these R&D type bullets, every customer will get their data, their measurements, and make their decision. To say, within this complex process, things are on track.
Are you able to provide a timeframe when the R&D bullet sets should be ready to be produced?
No, we wouldn't comment about details of that. As you know, everything happens throughout 2019.
Yeah, sure. Okay.
The next question is from Andrew Gardiner from Barclays.
Andrew Gardiner. Thanks for taking the question. I had another one on gross margin. To the prior question, mix this relative to last year was weaker in the first quarter, and you've already signaled you expect LED to remain at a relatively high level in the second quarter. I guess, can you give us an idea of how you're planning for mix to progress through the year? Is first quarter the weakest level of product mix and therefore gross margin we can expect?
Yeah, Andrew. The point is, definitely, I think for second quarter, it's fair to assume it will be the similar range because also the product mix might be quite similar to the first quarter, because we mentioned that the second quarter has quite a number of LED tools. Now, what's not clear is what will be the EUR month-to-month. I leave it to your own judgment what the EUR in short-term may do. In the second half, you see a shift and therefore the mix of applications and products you do in the second half is not fully clear, because that pretty much defines orders we take now, in particular in the last quarter. I personally do not expect a significant reduction in margins from Q3 and depending, of course, Q4, depend on the mix of orders.
Okay. Understood. Perhaps one for Charles. Again, on gross margin point, you highlighted some of the savings you had in the first quarter around product costs and warranty costs. I presume those are sustainable. Can you help quantify that? Is that a material element of gross margin in the first quarter that we can expect to continue? Thank you.
What we've done is, over the last 12 months, as Noel said, we reduced the product costs, and we expect that to be sustainable into the future. We have an activity which takes place here in Germany to continually reduce those costs, and that's what we're expected to do in the future.
To be clear, of course, the larger portion of the, let's say, increase in expected gross margin came by the dollar. I think this is not unfair to say. These cost reduction measures, as Charles said, they are continuous improvement measures, and they add a few tenths of % per month, quarter, and add up over time, over year to a range of one or little more than one % or so.
Thank you very much. That's helpful.
Thank you very much, everybody who was listening. With that, we are closing our Q1 2019 earnings call. Charles, thank you for joining, and goodbye. See you. Talk to you next time