Earnings Call: Q2 2018

Jul 26, 2018

Ladies and gentlemen, welcome to Xtron's Q2 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 Extron, for opening remarks and introductions. Thank you, operator. Let me start by welcoming you all to Exteron's Q2 and H1 2018 results conference call. I'd like to welcome our Executive Board represented by Doctor. Felix Gravert and Doctor. Bernd Schulde as well as our VP of Finance and Administration, Charles Russell. As the operator indicated, this call is being recorded by Extron and is considered copyright material. As such, it cannot be rerecorded or rebroadcast without expressed permission. Your participation in this call implies your consent to this recording. Please note that our Safe Harbor statement on Page 2 of our results presentation applies throughout this conference call. You may also wish to have a look at our latest IR presentation, which includes additional and new information on Exelon's Markets and its technologies and is available on our website. 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 Doctor. Bernd Schulte for opening remarks. Bernd? Many thanks, Guido. Welcome to the presentation of Exelon's first half twenty 18 results. Let me start the presentation with an overview of the key developments in the quarter before handing over to Charles Russells, who will elaborate on some important details of our financial performance. This then will be followed by Felix Gravett, who will discuss our view going forward as well as doing a quick wrap up before handing over to the Q and A session. We had a solid Q2. And as a result, we can confirm our 2018 full year guidance for revenue and profits, which we presented at our 2 recent result calls. The order intake in Q2 continued to be strong at €75,000,000 The major growth driver was, as in the previous quarter, the demand for our X2800 G4 MOCVD systems for laser and red ons yellow LED applications. We continue to see very encouraging signals from our customers with clear market preparation and positioning activity from major global players, specifically targeting 3 d sensing and optical datacom application and specialty LED solutions. In addition to those areas, we believe that the power electronics area could become a growing driver for Exxon in the upcoming quarters. With this positive development of the order intake, we are raising our order guidance to a range between EUR 260,000,000 EUR 290,000,000 from EUR 230,000,000 to EUR 260,000,000 previously. Revenues, however, at EUR 55,000,000 in Q2 were below the €62,000,000 we generated in Q1, which is due to the scheduled shipment agreements we have with our customers, causing the usual quarter to quarter fluctuation of shipments. We are confirming our guidance for revenues to be around EUR 260,000,000 Hence, revenues in the second half of the year will be stronger than in the first two quarters. Gross margin in Q2 was again strong at 43%, which was due to a favorable product and regional mix and supported by a strength in U. S. Dollar through the course of the quarter. EBIT and net income were around EUR 4,000,000 in Q2. Those were ahead of the same quarter last year, but below Q1 due to the just mentioned lower sales volumes. At this point, let me now hand you over to Charles for a more detailed overview of the Q2 2018 numbers. Thanks, Bernd, and hello to everyone. Starting on Slide 4, we had a good first half of the year with an order intake of €154,000,000 up 20% on the same period last year. On a quarterly basis, Q2 was similar to Q1 with order intake of €75,000,000 Consequently, we ended the first half of twenty eighteen with an equipment backlog of €138,000,000 up 48% on last year, 20% ahead of Q1 and the highest backlog since 2011. This gives us a good visibility for the remainder of the year and into the start of 2019. This positive development, as Bernd mentioned, is mainly due to the high demand for equipment used for lasers and red, orange, yellow LEDs. Revenues in the first half of the year were 3% ahead of 2017, but the improved product and regional mix produced a gross margin of 43% in both quarters and a profit at both EBIT and net income level. EBIT for the first half was €12,000,000 compared with a loss of €24,000,000 in the first half of twenty seventeen. Net income was higher than EBIT in the first half because of the deferred tax assets we recognized in Q1. Moving on to the next slide. Let me go into more depth on the income statement. Total revenues recorded during the first half 2018 were EUR 117,000,000 up from EUR 114,000,000 the previous year. On a quarterly basis, Q2 revenues were EUR 55,000,000 compared with EUR 62,000,000 generated in the previous quarter. This reflects, as Bernd said, the scheduled shipments to customers. The favorable product and regional mix we had in Q1 continued into Q2 with gross margins remaining at 43%. This is a considerable increase of the 25% in the comparable period in 2017 when inventories were being cleared. Operating expenses of €39,000,000 in the first half of twenty eighteen were 26% lower than the same period last year. The results last year included €12,000,000 in write downs related to the frozen activities as well as the operating expenses of the ARD CBD activity, which we sold. In a quarterly comparison, operating increased slightly to EUR 20,000,000 compared with EUR 19,000,000 in Q1. The main reason was expense from the translation of dollar based customer advanced payments at the quarter end exchange rate. This will be reflected in higher revenues as these orders get recognized as sales. Selling expenses of €5,000,000 in the first half of twenty eighteen were down 13% year on year. At 4% of revenues, this is the sort of level we expect into the future. In the first half of twenty eighteen, G and A expense reduced to €8,700,000 from €9,400,000 in the same period last year. The previous year's figure included legal and other fees related to the sale of ALD CBD. On a quarterly basis, G and A expense of €4,000,000 was in line with the previous quarter. Research and development costs in the first half of twenty eighteen were 6 percent less year on year, down to EUR 27,000,000 mainly due to the sale of the memory business and the freezing of the development activities. On a quarterly basis, R and D costs in Q2 of EUR 13,000,000 were slightly lower than Q1 €14,000,000 Our R and D costs in 2018 take into account the development work on OLED. The sales volume, gross margin and lower operating expense combined to produce an EBIT for the first half of €12,000,000 a substantial improvement over the first half of twenty seventeen. Net income was €16,000,000 Moving to Slide 6, which shows our cash flow statement. Operating cash flow was €12,000,000 in Q2 and minus €9,000,000 for the first half. This is after the payments related to the ARD CBD sale, which were explained in last quarter's call. Overall, working capital reduced in the quarter because of an increase in advance payments from customers. This was partly offset by an increased work in progress and receivables related to the increases in sales and regional mix of customers. We expect a positive operating cash flow for 2018. Cash at the end of June was €234,000,000 compared with 2 €47,000,000 at the end of 2017. Turning to the next slide, our balance sheet. The principal changes in Exron's balance sheet this year or this period are a reflection of the improving business. Shareholders' equity continues to improve the profitability. Inventories and advanced payments from customers have increased substantially because of increased orders and receivables have increased in line with sales. Now let me hand you over to Felix. Thank you, Charles. Let me give you a brief outlook on our perspective on our focused market and target application. We continue to have a strong order intake as well as growing equipment order backlog totaling €138,000,000 at the end of Q2, which gives us confidence about the rest of this year. We currently see strong growth drivers in the coming quarters, especially in the areas of lasers and specialty LEDs. Our equipment enables the development and production of key end products and components in growth areas such as 3 d sensing for phones and automobile, fine pitch displays and optical data communications. In optoelectronics, we see fast growing interest of customers for our products in the area of mini and micro LED displays. In power electronics, we observed a beginning volume ramp in the area of silicon carbide MOSFET, while we expect for gallium nitride power switches, the tipping point from R and D stage to volume production to be reached within the next 1 to 2 years. We see strong customer interest in our next generation equipment solutions for these areas, which gives a good assurance around our technology road map. In OLED, our first pilot product is currently tested by the customer, and we expect fab in into the customer facility soon. We are still in discussions with potential joint venture partners. These discussions have not materialized to a point of conclusion yet, but we expect this in the near future. In summary, Q2 was a strong quarter in terms of continued high order intake and revenues within our guided expectation. With a strong order book and continuing solid interest from customers for our solution, we are confident about what we expect will be a strong second half of the year. Based on these results, we refine our 2018 full year guidance for revenue and profit and increase our guidance for order. We expect revenues to be around €260,000,000 with order for 2018 between 2 and EUR290,000,000, up from the EUR230,000,000 to EUR 260,000,000 range we had previously expected. We expect gross margin to be around 40% of revenues and EBIT margin to be around 10%, both being at the top end of the originally guided ranges. We also expect to achieve a positive operating cash flow for the year. With that, I will pass back to you, Giro, before we take some questions. Thank you, all of you. Operator, we'll now take the questions, please. And the first questioner is Andrew Gardiner from Barclays. Good afternoon, gentlemen. Thanks for taking the question. I was interested in understanding a little bit more within the optoelectronics side of things. Clearly, that's driving a lot of volume at the moment. I was just wondering if you could talk about the breadth of customers that you're seeing taking the tools there. Clearly, one of your high profile partners, IQE, has talked about their own sort of production ramp, about the installation of tools. But away from there, I'm wondering are you seeing others sort of still in the preproduction qualification phase and so therefore sort of taking 1 or 2 tools here or there? Or are there signs of other parties in this part of the market preparing for much more high volume production ramps? Do you have better visibility into those ramps beginning? Yes. Thank you for the question. This is Bernd. Yes, certainly, I think we published our close collaboration with IQE and that we have shipped tools into their new factory, which they currently build up. So this is ongoing as we speak. And certainly, the numbers of customers who are increasing their volume in terms of manufacturing capacity is also increasing. So there are, I would say, 3, 4 other customers who are in the range. And we published about a company in Taiwan, BPEC, who comes in this arena, where they stand in detail with the qualification with the end customer That is certainly not clearly known to us. But one can expect if customers are ramping significantly that they have high confidence in their qualification. Thank you. Also just a quick one on the comment you made, Felix, on OLED and Apeva. Just I understand it's sort of it's still a bit uncertain, but if you could provide a bit more clarity around the statement, it would be helpful. So from what you described there, the customer is in the process or sort of ready to install the machine in their own fab. Do you actually have orders for that? Is there indeed an intent now for actual sort of production level tools? And therefore the discussions you alluded to with the JV partner that is more a question of sort of commercial and sort of practical terms rather than a gono go type decision? Thank you. Yes. No, I think very good question. Let me clarify. So as we have discussed in this place in previous quarters, currently, we test a product together with the customer. So it is installed in a facility in Asia. And together with engineers of the customer, this product is being tested. However, this product, which currently is being tested, is a smaller scale R and D prototype of Gen 2, what it is called. Think about A 4 page paper, writing paper, printing paper, this kind of a size, which the customer would then take it to a factory, test, let's see, to develop OLEDs on that one. And after that, the next step would be that the customer or that a larger upscaled prototype would be built, would be developed, also would be tested. And if such a large scale prototype is successful, then a customer could think about moving towards a volume production. So in the end, the OLED development is a multistep development together with the customer. And we talk here about the first step still on smaller samples of laboratory sites, as we have stated in this place in previous calls. Understood. Thank you. And the next questioner is Janardan Menon from Liberum. Over to you. Hi, good afternoon. Thanks for taking my question. I have a couple. The first one is the shipment the levels seem to have come down in Q2 versus Q1. Did you attributed that to the scheduling by customers? Was that a rescheduling? Did you see any push outs at all where customers who had originally said, I wonder in Q1 I mean, Q2 has taken it to Q3? Or was that as part of the initial contract itself? And just as a follow-up to linearity there? Do you expect Q4 to be higher than Q3? Linearity there? Do you expect Q4 to be higher than Q3 based on your current scheduling with customers? Or would it be more of a flattish profile? And I have a brief follow-up. Yes, Jonathan, thank you for your question. The shipments in the second quarter, the EUR 55,000,000 being The order income pattern in Q4 last year was pretty much pushed towards the Christmas time. And with that, some of those shipments have been shifted to Q3. So there is I want to say very clear, there is no request to push out. It simply was the contractual agreement we have with customer. Regarding the order of the second half, we're seeing probably an increase from the 2nd to 3rd quarter, and we would also expect a slight increase from 3rd to 4th quarter. Understood. Also on the order level, you raised your guidance to EUR 260,000,000 dollars to $290,000,000 for the full year, but you've taken $154,000,000 in the first half, which sort of suggests that even at the high end, you will see a slight decline in orders in the second half. Is that you just being prudent because you don't have full visibility on what kind of orders you could get towards the latter half of the year? Or is there anything specific there which makes you think that your orders could decline in the second half of the year? There is nothing specific. I mean mathematically, it's very simple to understand what you're saying. So the difference between €290,000,000 if you take the upper end and what we already have is less. Certainly, we're seeing a good momentum, but visibility 4, 5 months ahead is always somewhat limited. And with that, we certainly being in that sense, we have to take this into account. But we feel very confident with the EUR 2.60 billion to EUR 2.90 billion. Billion. And we really see this guidance as realistic. And there is nothing what we say that there is a change in the market or some specific things may happen. It is just you have to keep in mind also that the first half was very, very good. Understood. Thank you very much. And now we come to the next questioner. It is Uwe Schupp from Deutsche Bank. Yes. Thank you very much. Good afternoon, gentlemen. Two questions, please. First is on prepayments. We're obviously seeing some very credible signs out of the Chinese LED market now for the first time in many years. And it has been a long time since since you received larger LED orders or frame contracts. Could you maybe briefly remind us about your bookings policy for such larger orders if received. Reason I ask is obviously the 90% or so increase in prepayments at 90, right, if I saw it correctly. You've shown in Q2 versus Q1 in a quarter where you showed order flattish quarter on quarter or even slightly down. So any color you could give us here would be highly appreciated. And then secondly, Bernd, just on your earlier comment, is the impression correct that you are incrementally seeing more business for edge emitting lasers rather than VCSELs in the second half? Or do you think that the activity is actually quite similar and remains high for both technologies as regards 3 d sensing? And then maybe where you think those deployments would be going, whether this is indeed for Android in 2019, as I think you previously indicated at the Capital Markets Day? Yes, thank you, Uwe. Let me start with the second question, the edge emitting. As we elaborated, I think, in earlier calls, it's very hard for us to distinguish whether a tool in the end will be used for etch emitters as or for vertical cavity surfing emitting lasers. Simply the tools are almost the same or pretty much the same. So you can use the same tool for both devices. And you have to look more in the applications. So if you ask me straight, do we see edge emitting lasers coming stronger in use for the 3 d sensing? We do not see this right now in the moment, but we cannot exclude that because we are certainly not involved in all the product development of the end customer. We just want to highlight with also with the tax and my comments that it's both when we sell a tool, it's a VCSEL and an EDGE meter. Regarding the prepayments, I mean, Charles may also comment to that a little bit more, but just be talk about the booking policy. So we book orders when we have security in terms of the payments. And depending on the customer and the history of the customer, typically, we do that if we have received the down payment, if we have the required documentations to ship the tool or if we have no concern that these documentations will be issued, I'm talking about export license. We need certainly a clear we need a contract and we need a clear shipment date. And that I mean, that policy we have since I recall working here and it has not been changed. So the increase, of course, or the change in the prepayments varies from various factors. It depends how much you ship in the quarter because then your prepayments get reduced by the amount of the prepayment of the ship tool and depends on the order intake and depends exactly when the down payment arrives because customers with very high with a long history, with a good history in payments, we also take the order intake without having necessarily the money in the bank. But Charles, you may add to this. Yes. Just to say that, I mean, I would compare the advanced payments received with the order backlog rather than with the order intake because those are the, I think, the more relevant metric. And over the last 12 months or so, the ratio of one to the other has been between 42% 25%, and it's currently 38%. So there's nothing particularly unusual about the level of customer deposits we have relative to the order backlog at the moment. And earlier in the year, when it was perhaps a lower proportion, maybe we had a higher proportion of orders from the larger Western companies, which we don't necessarily take so many deposits from. That's very clear. Thank you. And I would have a follow-up, if I may. Felix, you indicated in your prepared remarks that indeed the I think you spoke particularly about the silicon carbide opportunity coming nearer and potentially being a growth opportunity. I think you said for the next quarters. Is that did I get you correctly here? And then maybe if that is correct, what would be some of the visible signs that we should be looking for that indeed this is a reality that is, yes, becoming or that's something that is becoming real for you guys? Is it more cars in the market? Is it how can we get comfort basically that your new machine is really indeed receiving the receptors that you would hope for it to get? Yes. I think, Uwe, I heard 2 questions out of that, right? So the one is really the timing question and then about the market and demand that we would see. And the second question, if I got it right about the growth drivers behind it, yes? I think as far as in our product. So as far as the timing goes, we do expect over the next quarters, in fact, quarters or years quarters and years, meaning in the near term, demand picking up for silicon carbide because the industry is preparing for a ramp. We all know that the silicon carbide starts from a relatively small base today, however, with very significant high double digit growth rate. And it remains to be determined how many tools that relates. So I would not want to quantify that opportunity right now here, yes? In terms of what growth drivers, what end markets, we do see in the initial phase the growth of silicon carbide being strongly driven by industrial applications within at a later stage, especially electric vehicles kicking in. And if you look to a time frame, maybe 3 to 5 years out, I think longer into the future, there is no visibility. There is strong indication that automotive applications will take as much as 40% or 50% of the total market. And of course, automotive the automotive industry has certain requirements in terms of quality, in terms of standards, and we are preparing accordingly in order to satisfy the demands of these customers. Relating to our products, we have a and that we have already previously announced, we have a new range of products under development with significantly higher throughput, meaning significantly improved cost of ownership for our customers. The product is in the development stage. But according to the specification, the target specification and the results we have in our laboratories, we see very strong customer interest. And over the next half year to 1 year, we would then see that confirmed from customers. And within the time frame of the year, we should see that confirmed. It's very helpful. Thank you, Felix. And now we come to the next questioner. It is Jurgen Wagner from MainFirst Bank. Yes, good afternoon. Thank you for taking my question. I have a follow-up on OLED. You mentioned that it's a multistep process. And what are the total costs you carry in your P and L at the moment? And what will that be in 2019? And the second question would be how much is, yes, it's emitting VCSEL laser equipment in your current order guidance for the full year? Thank you. So yes, we mentioned that the multi steps, yes, from a small substrate to scaling and at a later stage than becoming a volume line from a customer. We are expecting for the year 2018 a cost ticket for OLED in our P and L around €25,000,000 as we have previously said. For 2019, it would be too early for us to give an exact number. However, for 2019, we expect a significant reduction of this number. And it is too early to quantify how much that would be, yes? And the reduction would simply be due to the fact that certain elements of the development have been completed. And we will see 2019 also a beginning revenue stream against that. Okay. And let me comment on your question regarding our backlog and how much is attributed. Let me call it to laser applications because as I elaborated, we cannot really distinguish what is in the end the final use of the tool. But in terms of laser application, our backlog is between, I would say, 35% 45 percent in that range is our backlog dedicated for this laser application. Okay. Thank you. And before we come to the next question, I would like to remind And we come to the next questioner. It is Gunther Hoelfelder from Baader Helvea. Yes, many thanks. Just two brief follow-up questions. 1, also on the structure of your order intake. Did you expect a change this year in looking into the second half in terms of the share of opto, LED and power compared to the first half? There are always changes. I mean, this quarter, for example, we had more impacts by red on yellow LED order intake than the quarter before. But still, we had a relative high area for intake for lasers, but probably weaker on power electronics. I would think that going forward in the rest for the remainder of the year, we expect the power electronics to slightly increase. But definitely, the level is lower significantly lower than the Opto part. But within the Power part, we will see just if you compare power with power, a significant increase. Okay. Which is driven by gallium nitride at the moment or Both, gallium nitride and silicon carbide. But gallium nitride is definitely maybe from the short term. The shorter term, probably you're right, it's will be coming slightly sooner. And second last question, the order backlog, it's everything shippable in 2018, what you currently have? No, not everything. The majority is shippable, but not everything. Okay. Thank you. And the follow-up question comes from Janardan Menon from Liberum. Yes. I just had a follow-up on the OLED comment that you made that your OpEx, your R and D would reduce materially next year. Is that so even if you were to get another order for a larger size development tool during the course of the next few quarters? Or would it be dependent on that? And on a separate topic on MicroLED, has your view changed at all? Because in terms of the timing of that, the introduction of, say, microLED TVs, there's been some noise from people like Samsung on that. I mean, they're probably not exactly micro LED. They're probably more mini LED. But has there been any change in your view of that market in the last 3 to 6 months in terms of how the potential customers are developing the technology? Let us get started. Thank you for the question. Let us get started with the OLED topic, right? Yes, we would expect lower OpEx. Also, if we receive another order, and I would put it the other way around, which is as we have declared previously, we will only continue our OLED activities if we get another order, yes, because receiving now a follow on order for gradually scaling, yes, from the small scale laboratory prototype to a larger prototype and then later on moving towards volume. That is the prerequisite for this business at some point, reach a breakeven and then turning into profit. And if we would not get a follow on order, as stated previously, we would then not continue the OLED activity because we will not accept that this would continue to just be a cash and a cost frame. However, we have no signs that things may not develop as we expect them to develop. But just to reiterate what would happen in case a follow on order should not be coming. Understood. And Jazan, let me try to answer your questions on the micro LED. Let me make maybe a general statement and then a little bit more detail to it. Generally, we do not see that the timing of microLED into, let's say, a volume market has changed, meaning that I think this is still something between 3 to 5 years out. What we're seeing in the moment definitely, and this is very interesting and we're watching this, of course, there are quite some positioning activities of end customers or end companies to the end customer like Samsung and also other display companies are enhancing their activities into microLED. But you have to understand all the products you see there in the market, These are really positioning products. They are far, far, far away from being high volume manufacturable. So this is all areas we want or we need to develop. But I think in terms of dispositioning activities and the supply chain of these companies become has become, let's say, in the last 3 months, more active and getting more pushed by the end customer. And so our activities in this area has also increased because we are providing an essential production step to the microLED, and it is also essential to the cost basis and the performance. So our activities internally here with customers who are in the supply chain for Myco LEDs have indeed increased over the last month. Nevertheless, I think the overall time line until this gets in high volume and getting really into larger volume, this is definitely, I would say, unchanged, meaning 3 to 5 years. Understood. Thank you very much. Thank you. This concludes our results conference call. Please get in touch if you have any follow-up or additional questions. Thank you, and bye.