Ladies and gentlemen, welcome to AIXTRON's Q3 2018 results conference call. Please note that today's call is being recorded. Let me now hand you 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 Q3 2018 results conference call. 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 re-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 will therefore not read it out loud, but would like to point out that it applies to this 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 technology, and is also available on our website. This call is not being immediately presented via webcast or any other medium. 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 start giving you some insight into our core markets as well as an overview of the key developments in Q3 before handing over to Charles Russell, who will guide you through the financials. This will be followed by Felix Grawert, who will give you more insight about our joint venture with IRUJA and updates to the power electronics market. I will come back to wrap up. We had a solid third quarter with continued strong order intake, and as a result, we can again upgrade our 2018 full-year guidance. Last quarter, we increased our original order guidance range from between EUR 230 million and EUR 260 million to between EUR 260 million and EUR 290 million. We now see orders to be at the upper end of that guidance at around EUR 290 million.
The revenue guidance remains unchanged at around EUR 260 million. Last call, we gave you a guidance for EBIT margin of around 10% of revenues, which compares to approximately EUR 26 million. We also expected to achieve a positive operating cash flow. This call will see EBIT higher in the range of EUR 35 million-EUR 40 million, and consequently now with a positive total cash flow. With the signing of the joint venture agreement between IRUJA and AIXTRON, which Felix will explain in more detail, we have now completed the adaptation of our group structure, which we had initiated in 2017. We have focused our core business into attractive and future-oriented growth markets and with that reduced our R&D spending. Now we have shown that we were able to return to sustainable profitability.
Before I make more specific comments on our Q3 numbers, let me first talk about what is going on in our core optoelectronics markets, and Felix will later comment on power electronics. Our strongest market this year is for optoelectronics solutions business, and in particular for production equipment for the manufacture of so-called surface-emitting or edge-emitting lasers. These are key components of 3D sensor systems or data comm and telecom. We see this as a multi-year growth trend with multiple fast-growing end markets, from smartphones to robotics or to automobiles. However, 3D sensors are in the early stage of adoption, and it's not clear which sensing concept will have what share. That said, in the majority of the currently discussed technical concepts, the key components need to be manufactured with deposition equipment, and we are very well positioned with our best-in-class solutions.
Our next biggest markets this year are specialty LEDs, such as Red, Orange, and Yellow, or ROY LEDs for use in displays. We have seen strong interest from our customers for these solutions, but orders are rather lumpy with the Chinese LED manufacturers usually order in larger quantity at once. Let's now return to Q3. The good news is that we have seen strong interest for our full range of products, in particular solutions for the production of ROY LEDs, power electronics, and lasers. This is reflected in a solid order intake in Q3 at EUR 76 million, which leaves us with an order backlog of EUR 162 million, which is 56% higher than the same period last year and gives us good visibility going forward.
Q3 revenues were also solid at EUR 63 million, up 2% on the same quarter last year, and 15% up on the previous quarter. We also had a very strong quarter in terms of profitability, driven by a high gross margin of 44% and good control of operating expenses, which resulted in an EBIT of nearly EUR 9 million and a net income of EUR 12 million. This is a good point to hand you now over to Charles for a more detailed overview for the Q3 2018 financials. Charles?
Thanks, Bernd, and hello to everyone. Starting on slide five, we had a good third quarter with an order intake of EUR 76 million, which was similar to the previous quarter and 10% ahead of the EUR 69 million we had in the same quarter last year. On a nine-month basis, order intake was EUR 230 million, which was 16% ahead of the same period last year. We ended the third quarter of 2018 with an equipment backlog of EUR 152 million, 10% ahead of Q2 and the highest backlog in seven years. This gives us a good visibility for the remainder of the year and into 2019. On a like-for-like basis, excluding the sold activities, revenues in the first nine months of the year were 30% ahead of the same period in 2017. The improved product and regional mix produced a gross margin of 43%, which was well ahead of last year's 30%.
EBIT was EUR 21 million and net income, EUR 28 million in the first nine months. Net income was higher than EBIT because of deferred tax assets, which we have recognized in 2018. Moving on to the next slide, we'll be going into more depth on the income statement. Total revenues recorded during the first nine months of 2018 were EUR 181 million, up from EUR 176 million in the previous year. On a quarterly basis, Q3 revenues were EUR 63 million, compared with EUR 62 million in Q3 last year and EUR 55 million in Q2. Gross margin was 44% in the quarter, 43% in the nine-month period. A favorable product and regional mix, together with strengthening dollar, helped sustain this high level of profitability. Gross margins in the same period last year when inventories were being cleared and the product mix was not so good, were 30%.
Operating expenses of EUR 58 million in the first nine months of 2018 were 21% lower than the same period last year. A comparison with last year's OpEx is not on a like-to-like basis, 2017 includes write-downs and the expenses of the activities we sold last November. On a quarterly comparison, operating costs were stable at EUR 19 million, compared with EUR 20 million in Q2, EUR 19 million in Q1. Selling expenses of EUR 2 million and G&A expenses of EUR 5 million in Q3 were in line with the previous two quarters. R&D costs in Q3 of EUR 13 million were similar to the previous two quarters as well. Overall, EBIT for the first nine months was EUR 21 million and net income, EUR 28 million, both substantial improvements over the same period in 2017. Net income in Q3 was EUR 12 million, after recognizing a further EUR 4 million of deferred tax assets.
Moving to slide seven, which shows our cash flow statement. Operating cash flow was EUR 5 million for the first nine months and EUR 14 million in Q3. The operating cash inflow in the quarter by and large reflected the profitability. Net changes in working capital were funded largely by increased customer deposits. Cash at the end of September was EUR 245 million, compared with EUR 246 million at the end of 2017. Turning to the balance sheet on the next slide, the main changes are an increase in inventories and the associated customer deposits, reflecting the strong order backlog for delivery over the next months, and a reduction in receivables to 45 days sales outstanding. With that, let me hand you over to Felix.
Thank you, Charles. Let me briefly discuss the current prospects in the market for power electronics and give you some more flavor on the OLED joint venture announced last week. We are currently seeing growing interest for our MOCVD equipment for power electronics, and this quarter we received a noticeable amount of orders for this application. For the first time, we have more orders on production capacity expansion rather than just for development and for product qualification. In particular, for radio frequency RF data transmission, we see the market in a phase of production expansion with more room for growth, driven by the bandwidth needs of next-generation mobile networks, which is 4.5G or 5G networks, which is addressed by either gallium nitride on silicon carbide or GaN on silicon solutions.
Also, in the market for GaN on silicon power switches, we see several customers moving from qualification to production phase. In both these markets, our equipment serves the customer needs for high productivity in combination with high uniformity. In the market for silicon carbide epi wafer production, we have observed major capacity expansions in 2018 and orders reaching well into 2019, the majority of which currently still being placed at our competitor. However, our project for a fully automated Planetary Reactor for silicon carbide is moving ahead on schedule and as planned, and we receive very positive customer feedback on the target specification. This gives us good confidence that we will be able to gain market share as soon as this tool is qualified at customer. Last week, we announced a joint venture agreement with the South Korean OLED display supplier, IRUJA Co. Ltd.
Under the agreement, IRUJA will contribute automation and handling technology as well as some cash to our OLED business, Apeva, with the goal of obtaining up to 20% of that business over the next few years. A large part of the automation and handling team of IRUJA, as well as their current CTO, is transitioning to Apeva Korea. Along, they bring IRUJA's well-proven automation and handling technology in form of software, CAD drawings, and most valuable, experience. Handling of glass substrate with highest reliability, minimum downtime, and minimum glass breakage is a critical task in the display industry. Imagine in a Gen 8 system, a sheet of glass for display is more than five square meters in size, but less than one millimeter thick, and it is moving through the OLED production line hundreds of meters in length.
Our partner, IRUJA, is a market leader in sputtering technology for OLED and well-known for its highest reliability solution, having proven the capability to handle such requirements. By closing the joint venture, Apeva will become a complete deposition system provider for the organic material layers within the OLED stack. Its product offering will span the complete set of key modules from innovative organic evaporation sources, deposition process technology, as well as substrate handling systems and the required vacuum technology. With part of the IRUJA automation handling team moving to Apeva, we start building our Korean organization, which is essential for localizing production and sourcing in Korea, and also for getting an in-depth understanding of customer requirements going forward. Furthermore, IRUJA will be the manufacturing partner for a significant portion of Apeva's OLED deposition system.
We are very glad to have found a real partner for manufacturing who will be much more eager to meet deadlines and quality targets than just a local contract manufacturer that we would have had to work with otherwise. Our partner, IRUJA, is well-connected in the Korean display value chain. We see the signing of the JV also as a proof of trust by IRUJA, that they also see the high potential of Apeva's OLED technology. Overall, we are very excited about the joint venture, as we believe it will make Apeva a complete deposition solution provider for organic material layer. Currently, we are installing our Gen 2 OLED production solution for testing at a major Asian display manufacturer.
We are very hopeful to sign a production order next year for a prototype type system scaled up to full production size as a next step in our journey towards mass production. With this, let me hand back to Bernd for a summary and closing remarks.
Thank you, Felix. Let me summarize the major points discussed today before we move to your questions. Firstly, we are seeing strong interest in our diversified range of products from a growing set of customers, which gives us confidence in the quarters and years ahead. Secondly, we are firmly focused on best-in-market solutions to produce compound semiconductors, for which we see a multiyear growth trend. Thirdly, we are in a strong financial position with our strongest order backlog since 2011, with healthy margins being generated. We see orders at around EUR 290 million and revenues at around EUR 260 million, which both are at the upper end of the guided ranges. We also expect gross margins to be around 40%, with EBIT between EUR 35 million and EUR 40 million. Furthermore, we now expect to generate positive total cash flow.
With that, I thank you for your attention, and I pass you back to Guido before we take your questions.
Thank you, Bernd, Felix, and Charles. Operator, we will now take the questions, please.
Yes, thank you. Ladies and gentlemen, if you would like to ask a question, please press 9 and the star key on your telephone keypad. In case you wish to cancel your question, please press 9 and star again. Please press 9 and star to state your questions. The first questioner is Uwe Schupp from Deutsche Bank. Over to you.
Good afternoon, gentlemen. Thanks for taking my questions. Two questions, please, actually. First, Felix on OLED, just a few more maybe clarification details, rather. First of all, can you give an indication about the absolute amount of the cash contribution, just indication-wise? Secondly, how do you account for the cash at Apeva or AIXTRON? Is this dedicated in the Apeva subsidiary, or basically, where will you show it? Then really, how confident are you for first production system or pre-production system next year? Then maybe lastly on OLED, do you expect to pull more on the smartphone side or on the TV side? Because historically, my understanding is the Asian display customer has been shifting a bit back and forth between the two applications. Then secondly, Bernd, at Q2, you highlighted that we should be prepared for weaker gross margins in the second half.
You blamed product mix back then. Given higher LED share, I guess that was probably what you meant. Today, you reported obviously very strong gross margin after 9 months. I think you are at 43%. I guess the simple question would be if we should model a substantially weaker Q4 gross margin based on product mix, or are you simply very cautious here again? Thank you.
Thank you very much, Uwe Schupp. Let's take the question from the OLED first. We've decided not to review the exact amount invested. However, the investment is expected to cover the cash needs of Apeva until break-even point according to the current business plan. The amount is getting invested directly into Apeva, together with a smaller investment side from the AIXTRON side. Together, this is the plan to bring this to the break-even point. Another step to make Apeva now fully independent, or so to say, to give Apeva once the cash injection that is needed until the business comes floating. Of course, that is subject to the orders from the customers coming as desired. That leads me to your third question, how confident we are that we will get an order in 2019 for the next larger scale of system.
Once again, as we mentioned, we are executing our development program, which comes in multiple steps. Currently, we are now installing our Gen 2 system beside the customer. The customer will test this system, and it has to live up to the value proposition that we are expecting. If this value proposition is verified, of course, we can expect to get an order. If it fails to fly, we will not get the order. That is the risk, which is still there and is based, as we had always mentioned. To your question about the target market, smartphone or television. Once again, this depends largely on the decision of our customer. Along with that, it's going to be likely different sizes. A television system would be a larger size than a smartphone system.
Once again, I would not want to anticipate here the decision of the customer before it is being made, because we understand that at our customers, a number of things really depend on the very situation of the technology and on their internal roadmap discussion. We will follow our customer's wish here. With this, I will hand over to Bernd.
Schupp, thank you for your question. Certainly, you remember well that we announced that the product mix in the second half in terms of gross margin will be less than in first half, and indeed now you see it's not exactly the case. That has to do, in Q3 in particular, with the clearly stronger dollar. But also, we see here certain cost reduction measures in terms of Design to Cost activities taking some benefit, which were difficult to anticipate when exactly we will get them into execution. Regarding Q4, certainly Q4 will be at a lower gross margin than in Q3. This is quite logical going forward. When you look in our EBIT guidance and the range we have given, we're also anticipating certainly a continued stronger dollar than 120, what is our usual anticipation for the year.
This range basically is covering the potential difference in dollars. We will see definitely some reduction in gross margin in Q4 compared to the other quarters, but not dramatically.
Yeah, I was going to say that the dollar continues to be a tailwind, presumably, given the S at 120 budget rate, we have a spot at 114, 115. Plus, I guess the Design to Cost measures are probably also here to stay, right? Or is there any reason to assume why they should be evaporating rather sooner than later?
No, they will certainly stay.
Thank you. Very clear.
Next up is Charlotte Friedrichs from Berenberg.
Hello. Thank you. I have a few questions. First one is on order intake. Can you give us a bit of an idea of what the split was in nine months or Q3? Looking at your guidance for the full year, that implies a slowdown in Q4. Is there a particular reason or a driver for this? Second question would be around opto, and if you've seen any news here on your clients' ramp-up plans, if there's the new announcement, any postponements, et cetera. Finally, the third question is around the cost structure. If you are now roundabout at what you would call a run rate, and if you can maybe give us a bit of color on your R&D spending going forward, especially also now that you have made progress with the JV. Thank you.
Okay. Coming to the order intake split in Q3, I think we mentioned it during our speech. We had a pretty even split between our main applications, which are systems for lasers, systems for LED, and there the majority is for red, orange, yellow LEDs and power electronics. This is noticeable because it definitely shows an increase in orders for the power electronics side. For your questions regarding optoelectronics, whether we see a significant change in the market in the sense that customers trying to postpone shipments. To answer directly, no, we do not see that. About new customers, I think I mentioned already, I think in the last call, I believe, that we're seeing new entries of customers in particular coming from Asia, and they are in particular from China. Charles, you may mention about-
Okay. On the question about the run rate of the expenses, I think we are at a more or less stable level for run rates, although I would expect that the R&D spend in Q4 will be slightly less because some of the expenses associated with some of the lumpy projects will be less in Q4. Going forward into 2019, as Felix said, we will be building up an organization of Apeva in Korea a little bit. So there's the effect if we get an order for a larger system in Korea, in 2019, the overall effect on the results will be less from Apeva. I don't see a huge reduction in the expenses.
Okay. Thank you.
The next questioner is Janardan Menon from Liberum.
Hi, good afternoon. I'm just wondering about your outlook. I know you're not going to comment on 2019, but your sales are spiking quite a bit into Q4. You're going from around EUR 65 million to about EUR 80 million of sales, quote from Q3 to Q4. Based on your backlog, which gives you quite a bit of visibility into the early part of next year, would you expect that run rate to sort of drop back in Q1 to the 65-ish kind of level, or do you think it'll continue at a slightly higher level, closer to Q4 level based on your current visibility? I have a couple of follow-ups.
Yeah. Thank you, Janardan. You're quite right. The sales will increase in Q4, that's obvious. In terms of run rates going forward, we give you that guidance for the full year order intake, which give you certain suggestions, meaning around from EUR 230 million to around EUR 290 million. Honestly, for the run rate Q1 is a little bit early in terms of order intake to speak. Please bear with us a bit until we can speak about it.
Okay. On the silicon carbide, the new higher productive platform, I presume your current order intake does not include any order for that system as yet, since it's still in qualification. I was just wondering, once that system gets qualified and given the kind of demand profile that silicon carbide has in the market for the next many years, what kind of orders do you think is reasonable? Would about EUR 10 million a quarter or in that range be reasonable, Which will come on top of your underlying orders for your existing businesses, or would that be too optimistic?
Well, I think that really depends on the market share. Jumping to your second question, by the way. That really depends on the market share we can gain with the system. Right? You're right, there is no orders on the system yet. It needs to be qualified first. This is for sure. Yeah. Then relating it to the sales volume and the potential, I think it can outgrow the EUR 10 million you mentioned, if it's dominating a large market share very much. Yeah. However, that still needs to be proven. We are in a catch-up position. Yeah. As we mentioned, the market today is with a competitor. Of course, we are here very ambitious, but that remains to be proven how much share we actually will get. Yeah. We are aggressive.
Got it. My last question is on the LED side of your business, where the revenue run rate seems to have fallen quite a bit in 2018 compared to 2017, where you were sort of averaging EUR 15 million-EUR 20 million a quarter across the four quarters. I was just wondering, I understand that it's lumpy and that some of it is coming from big Chinese orders, et cetera. Is there any specific reason why we will be sustainably at a lower run rate on that business? Can we go back to the kind of run rate that we saw in 2017 on the specialty LED side?
Well, Janardan, as I mentioned, the LED business and the order intake, then with that, also the revenue has a certain cyclicality. Don't forget, in 2017, we had the sell-off of the AIX R6 inventory, which were also reported under the LED product segment. With that, we received more orders in this year, which basically now getting in the second half shipped in terms of probably generating revenue in the second half of this year, and will even go into the first half of next year.
Okay.
Well, it's timing. It's pure timing and basically the run cycles of customers.
Got it. All right. Thank you very much.
The next questioner is Andrew Gardiner from Barclays. Over to you.
Good afternoon. Thanks for taking the question. I had another one on OpEx. I suppose sort of the financial guidance more broadly for the fourth quarter, as implied by the 2018 profit guidance. If gross margins even remain sort of flattish or slightly down based on what you've described, and you hit the revenue guidance, to get towards the higher end of that range to the EUR 40 million for the year, it implies a more material drop in OpEx. I suppose, Charles, to your point, just how lumpy were things in the third quarter that could lead to a bit more of a down tick in fourth quarter?
Put another way, what is it that can get you towards the high end of that EUR 40 million range?
Thanks for the question. I think that the guidance is gross margin around 40%. I would think personally it's somewhere between where we are now and 40%. The OpEx, I think will be down a little bit by maybe a couple of million or so. What will get us to the higher end of that or towards the higher end of that is what happens with the exchange rate. We typically ship quite a lot in November and December, and it depends what's happening with the exchange rate towards that time. These are the things that could get us towards the higher end. The guidance is 35%-40%, not 40%.
Perfect. Okay. That's understood. Just as I think into 2019, if I recall what you said at 2Q, the P&L cost for Apeva was around EUR 25 million this year, and you thought at the time it would decline into 2019. I take it from obviously the progress you've made, the signing of the JV and what you describe in infrastructure, that is no longer the case, and in actual fact, is it going to be sort of flattish at that EUR 25 million level, or are there more moving parts around that?
No. It's clearly planned that the OpEx for the OLED for the Apeva is expected to decline as previously announced. What exactly that number will be will also depend largely on the size and the timing of the customer contract or customer order. Yeah. No new details on that bit, but I would say with the message that it will be reduced.
Okay. Understood. Thank you, Felix.
Now we come to the next questioner. It is Jürgen Wagner from MainFirst Bank.
Good afternoon. Thank you for taking my question. You mentioned the silicon carbide new platform. When will you see qualification? Next year? Second question on your. You mentioned new customers for VCSEL or edge-emitting for laser equipment out of China. How do you expect the installed base for your equipment to develop going forward, especially into 2019? Thank you.
Let me take the question on silicon carbide first. The qualification is beginning very soon. The first tool is being installed at a customer within a week from now. The qualification will run and expand throughout the first half of 2019. We will then see how fast it is finished, be it late spring, be it late summer. We will see that. Clearly, we expect the qualification to be concluded and finished at a customer premise during 2019.
Maybe follow up to this. That will be then early enough to generate some revenues next year for your new platform?
Yes.
Yeah. Okay.
To your questions, the development of the VCSEL market. Well, in general, we have seen over the last 18 months, basically the market has developed, I would say, in 3 phases. First phase, we have the tier 1 players, which are dominantly supplying the current end customer for cell phones. Basically these customers have ramped their capacity about 12 to 18 months ago, giving the orders. They all have invested in significant increases of factories, which are now getting into the phase of being finished. It is to be seen when they continue their investment into the next level. Second phase has been fast followers from Asia, maybe Taiwan. What we have seen recently, to say the 3rd phase, these are new entries from China.
Basically companies we haven't known much before, and who are want to run up a certain entry in this market, in particular to get a certain share in the local Chinese market for 3D sensing applications. Basically, when you look in the future, I see the question is, when are the tier 1 players who have started to invest 18 months ago, when are they going into the next phase of their production then? That is depending on many factors, of course, what end products will get equipped with 3D sensing solutions. I mean, for that, we also do not know more than you in terms of what cell phone makers will bring up what products. In principle, I think it's just a matter of timing. It's not a matter of a general discussion.
Because all the customers, as I mentioned, they have done a significant investment in new factories.
Okay, understood. Thank you.
The next question comes from Malte Schaumann from Warburg Research.
Good afternoon. One question left on the silicon carbide business. With how many customers are you in talks regarding potential qualification tool? Secondly, is the timing, the availability then from your tool sufficient to meet the customer's demand to ramp capacity in power electronics?
We are currently talking to all market participants relating the specification and the tool, and we receive very positive feedback, as mentioned, very broad across the market, across all continents. We have multiple, more than three customers with qualification tools. To your question, whether we will be able to meet a, let me interpret your question, a sudden demand spike, if the interest then really comes, we would not see any reasons we can't serve and address that demand.
Okay, good. Let me add something to relate to the last question. Do you see the, from a timing perspective, from the market demand, customers can wait for your tools and are not forced to make investments that might come too early for you?
We see in the market a continuing large investment wave that is ongoing. The large investments have been made in 2018. Even larger investments are being made in 2019. We see a continuous investment even further growing in 2020. We see this not as a, let me call it, a one-time wave with us being too late to catch the wave. Rather we do see, because it's a very broad market with market participants from Europe, from North America, entering now from China, but also, as we all know from Japan, big automotive industry there, a very broad market and a continuous gradually growing expansion.
Yeah, sure. Thanks.
The next questioner is Behzad Tazi from ODDO BHF.
Yes, thank you for taking my questions. The first one would be basically on the VCSEL business. You mentioned the different technologies in the market, and it's not clear which technology will become the mainstream technology. Does it matter for you if it's time of flight or structured light or other solutions from an equipment supplier perspective?
Yeah. Thank you, Behzad. This was I want to try to point to make here. It really does not matter too much for us because in the end, you need a laser device as a basically light source for the solution. With that, I think in the end, you would need an MOCVD tool for the deposition of these laser devices.
The quality requirements between these three technologies, what we have, is the one which favoring rather you versus your competitors or doesn't really matter that much?
I don't think there's a big difference. You need in all cases very high performance in terms of yield
Light output power. We think that in general, the specifications in one or the other are quite similar.
Okay. On the power business, you commented a lot about silicon carbide. Looking at the gallium nitride part of the business, it looks like you're surprised by the strong order entry in Q3, or you were not maybe anticipating that. Do you think this is with all the applications picking up in communication and data and the telco network equipment, do you think this recovery or this strong momentum in Q3 to accelerate or to continue in 2019, particularly in first half?
We interpret this now, or what we believe and what we see in discussions with our customers, is the markets for gallium nitride being at a tipping point. We do see that the market for radio frequencies, so for the data transmission, is in a continuous expansion phase, and that expansion phase continues, similar what we mentioned to silicon carbide, but at a slightly smaller rate. What is new, what I mentioned in my speech, we do see now that the market also for gallium nitride power supplies, so far customers have been buying systems for R&D, for a qualification, a system here, a system there. Essentially they do that with the R&D teams and our customers. Now we see step by step orders coming really from the production teams.
We know that on our tools, volume production is running, and we expect, again, it starts from a small base, but we expect that starting from this small base, continually, this will grow in a real production volume. We interpret the current order momentum as a change of the market trend.
Final one on your cash position. If I strip out what you need for your operating business, then spare cash is something around EUR 180 million something. Any plans with the cash position? Small acquisition, maybe where you think you have in your technology some black dots which you need to fill or any kind of giving some cash back to the investors as you are now turning the business around with decent profitability and free cash flow visibility?
Yeah. Please keep in mind, I mentioned this also in the speech, that we basically now at the point where we have really completed the new adoption of the group structure, meaning coming out of a phase where we lost significant money and turned it into a profitable business with focusing on the different products, which are our key technology. With completing this, of course, we now have to think about how we move forward. This is a process we are now beginning, so far, we cannot give comments and details in what we are going to do with cash. Also keep in mind that we are a business as an equipment manufacturer, we always have significant cash demand.
Our business model is always in a situation or in a complexity that we do not want to go back to the local bank to borrow money. This is very important for us to have a solid and strong cash position.
Understood. Thank you very much. Congratulations to the results.
We have a follow-up question from Uwe Schupp, Deutsche Bank. Just a second. Mr. Schupp, your line is open now. Sorry.
Yeah, just to follow up on the 5G question from Behzad just a minute ago. Have you ever tried to size the market for 5G? As of now, will it be a VCSEL size of a market or will it be, for whatever reason, much smaller or much bigger? Probably can't mention customer names, but who would be the IQE, so to speak, of that particular market? Maybe regionally you can nail it down somewhat. That would be very helpful. Thank you.
Yeah. On the 5G market, yes, of course, we do have a sizing of the market. The market falls essentially in two sub-markets, the one being in the base band equipment that is installed on the telecom tower. Let me put it this way. The other market would go into the higher frequencies of the 5G band, 20 to 60 gigahertz, which is in the cell phone. That would double the market size. The future will show, and the decisions of the telecom operators and of the mobile phone makers, when which part of the market is coming. I would not want to give here a sizing of the market, but we clearly see that the whole discussions around Internet of Things, autonomous driving, and so on, those parts are clearly not a topic for 2019, but further down the road.
If these things materialize, the higher frequency band will be used, and if this frequency band is used, that market will need the gallium nitride power amplifier in the phone. We see this as a long-term trend.
Can you indicate a few customer names or maybe again nail it on regionally where we are seeing that demand coming from right now?
As you know, we have a very high market share in the GaN power. I think you know who the players in the market are. Take them as our customers.
That's very clear. Thank you.
Thank you, all. This concludes today's Q3 results conference call. Our next results will be announced on February 26th, 2019. This will be the full year 2018 results. In the meantime, I hope to see some of you on either the upcoming investment conferences or meetings in Europe or the U.S. Until then, see you later. Have a good day. Thank you.