Ladies and gentlemen, welcome to AIXTRON'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 AIXTRON for opening remarks and introductions.
Thank you, operator. Let me start by welcoming you all to AIXTRON's Q2 and H1 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. Please note that our safe harbor statement on page two 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 AIXTRON's market 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 Dr. Bernd Schulte for opening remarks. Bernd?
Many thanks, Guido. Welcome to the presentation of AIXTRON's first half 2018 results. Let me start the presentation with an overview of the key developments in the quarter before handing over to Charles Russell, who will elaborate on some important details of our financial performance. This then will be followed by Felix Grawert, who will discuss our view going forward, as well as doing a quick wrap-up before handing over to the Q&A session. We had a solid second quarter, and as a result, we can confirm our 2018 full year guidance for revenue and profits, which we presented at our two recent result calls. The order intake in Q2 continued to be strong at EUR 75 million. The major growth driver was, as in the previous quarter, the demand for our AIX 2800G4 MOCVD systems for laser and red-orange-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 3D sensing and optical data communication application and specialty LED solutions. In addition to those areas, we believe that the power electronics area could become a growing driver for AIXTRON in the upcoming quarters. With this positive development of the order intake, we are raising our order guidance to a range between EUR 260 million and EUR 290 million from EUR 230 million to EUR 260 million previously. Revenues at EUR 55 million in Q2, were below the EUR 62 million 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 million.
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 strengthening U.S. dollar through the course of the quarter. EBIT and net income were around EUR 4 million in Q2. Both 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, hello to everyone. Starting on slide four, we had a good first half of the year with an order intake of EUR 154 million, up 20% on the same period last year. On a quarterly basis, Q2 was similar to Q1 with order intake of EUR 75 million. We ended the first half of 2018 with an equipment backlog of EUR 138 million, 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 EUR 12 million, compared with a loss of EUR 24 million in the first half of 2017. 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 of 2018 were EUR 117 million, up from EUR 114 million the previous year. On a quarterly basis, Q2 revenues were EUR 55 million, compared with EUR 62 million 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 over the 25% in the comparable period in 2017, when inventories were being cleared. Operating expenses of €39 million in the first half of 2018 were 26% lower than the same period last year. The results last year included €12 million in write-downs related to the frozen activities, as well as the operating expenses of the ALD CVD activity, which we sold. In a quarterly comparison, operating costs increased slightly to €20 million, compared with €19 million in Q1. The main reason was expense from the translation of dollar-based customer advance 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 million in the first half of 2018 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 2018, G&A expense reduced to €8.7 million from €9.4 million in the same period last year. The previous year's figure included legal and other fees related to the sale of ALD CVD. On a quarterly basis, G&A expense of €4 million was in line with the previous quarter. Research and development costs in the first half of 2018 were 6% less year-on-year, down to €27 million, mainly due to the sale of the memory business and the freezing of the development activities. On a quarterly basis, R&D costs in Q2 of €13 million were slightly lower than Q1's €14 million.
Our R&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 million, a substantial improvement over the first half of 2017. Net income was €16 million. Moving to slide six, which shows our cash flow statement. Operating cash flow was €12 million in Q2, and minus €9 million for the first half. This is after the payments related to the ALD CVD 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 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 million, compared with €247 million at the end of 2017. Turning to the next slide, our balance sheet. The principal changes in AIXTRON's balance sheet this year, or this period, are a reflection of the improving business. Shareholders' equity continues to improve with profitability. Inventories and advance payments from customers have increased substantially because of increased orders, and receivables have increased in line with sales. Let me hand you over to Felix.
Thank you, Charles. Let me give you a brief outlook on our perspective on our focus markets and target applications. We continue to have a strong order intake, as well as growing equipment order backlog totaling EUR 138 million 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 3D sensing for phones and automobiles, fine pitch displays, and optical data communication. In optoelectronics, we see fast growing interest of customers for our products in the area of Mini-LED 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&D stage to volume production to be reached within the next one to two years. We see strong customer interest in our next generation equipment solutions for these areas, which gives us good assurance around our technology roadmap. 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 orders. We expect revenues to be around EUR 260 million, with orders for 2018 between EUR 260 million and EUR 290 million, up from the EUR 230 million to EUR 260 million range we had previously expected. We expect growth 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, Guido, before we take some questions.
Thank you, all of you. Operator will now take the questions, please.
Yes. Ladies and gentlemen, if you would like to ask a question, please press Nine and the Star key on your telephone keypad. In case you wish to withdraw your question, please press Nine and the Star key again. Please press Nine and Star to state your questions. 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 optoelectronic 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. Away from there, I'm wondering, are you seeing others sort of still in the pre-production qualification phase, and so therefore sort of taking one or two tools here or there? 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? Thank you.
Thank you for the question. This is Bernd. 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. 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. There are, I would say, three, four other customers who are in the range. We published about a company in Taiwan, VPEC, 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. One can expect if customers are ramping significantly that they have a high confidence in their qualification.
Thank you. Also, just a quick one on the comment you made, Felix, on OLED and APEVA. I understand it's still a bit uncertain, but if you could provide a bit more clarity around the statement, it would be helpful. 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 go, no-go type decision? Thank you.
Yeah. No, I think a very good question. Let me clarify. As we have discussed in this place in previous quarters, currently, we test a product together with the customer. 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&D prototype of Gen 2, what it is called. Think about A4 page writing paper, printing paper, this kind of a size, which the customer would then take it to a factory, test it, see to develop OLEDs on that one. 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.
If such a large-scale prototype also is successful, then a customer could think about moving towards a volume production. In the end, the OLED development is a multi-step development together with the customer. We talk here about the first step still on smaller samples of laboratory size. As we have stated in this place in previous calls.
Understood. Thank you.
The next questioner is Janardhan 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. 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 wanted Q2," has taken it to Q3? Was that as part of the initial contract itself? Just as a follow-up to that, when you look at the second half, you said second half will be higher in revenues than the first half. Can you give a little bit more linearity there? Do you expect Q4 to be higher than Q3, based on your current scheduling with customers, or would it be more a flattish profile? I have a brief follow-up.
Yeah, Janardhan, thank you for your question. The shipments in the second quarter, the EUR 55 million and being slightly below the first quarter has only originated by the contracts we made. The order income pattern in Q4 last year was pretty much pushed towards the Christmas time. With that, some of those shipments have been shifted to Q3. There is, I want to say very clear, there is no request for 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 second to third quarter, and we'd also expect a slight increase from third to fourth quarter.
Understood. Also on the order level, you raised your guidance to EUR 260 million-EUR 290 million for the full year, but you've taken EUR 154 million 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. Mathematically, it's very simple to understand what you're saying. Yeah. There's a difference between EUR 290, if you take the upper end, and what we already have is less. Certainly, we're seeing a good momentum, but visibility four or five months ahead is always somewhat limited. With that, we certainly, being in that sense, we have to take this into account. We feel very confident with the EUR 260-EUR 290. We really see this guidance as realistic. There is nothing what we say 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.
Now we come to the next questioner. It is Uwe Schupp from Deutsche Bank.
Yeah. 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. It has been a long time 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, if I saw it correctly. You've shown in Q2 versus Q1 in a quarter where you showed orders flattish quarter-on-quarter, or even slightly down. Any color you could give us here would be highly appreciated.
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? Do you think that the activity is actually quite similar and remains high for both technologies as regards 3D sensing? 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. Thank you.
Yeah. 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 edge emitters or for Vertical-Cavity Surface-Emitting Lasers. Simply the tools are almost the same or pretty much the same, so you can use the same tool for both devices. You have to look more in the applications. If you ask me straight, do we see edge-emitting lasers coming stronger in use for the 3D 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 also with the text and on my comments that it's both when we sell a tool, it's a VCSEL and an edge emitter. Regarding the prepayments, Charles may also comment to that a little bit more, but just talk a bit about the booking policy. 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 a tool, or if we have no concern that these documentations will be issued. I'm talking about export license. We need certainly a contract, and we need a clear shipment date. That policy we have since I recall working here, and it has not been changed.
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 shipped tool, and depends on the order intake and depends exactly when the down payment arrives because customers with a long history, with a good history in payments, we also take the order intake without having necessarily the money in the bank. Charles, you may add to this.
Yeah, just to say that, I would compare the advance payments received with the order backlog rather than with the order intake because those are, I think, the more relevant metric. Over the last 12 months or so, the ratio of one to the other has been between 42% and 25%, and it's currently 38%. There's nothing particularly unusual about the level of customer deposits we have relative to the order backlog at the moment. 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. I would have a follow-up, if I may. Felix, you indicated in your prepared remarks that indeed 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. Did I get you correctly here? 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 becoming, or that something that is becoming real for you guys. Is it more cars in the market? How can we get comfort, basically, that your new machine is really indeed receiving the acceptance that you would hope for it to get? Thank you.
I think, Uwe, I heard two questions out of that, right? The one is really the timing question and then about the market and demand that we would see. The second question, if I got it right, about the growth drivers behind it. I think as far as our products. As far as the timing goes, we do expect over the next quarters, in fact, 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 rates. It remains to be determined how many tools that relates to. I would not want to quantify that opportunity right now here.
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, with then at a later stage, especially electric vehicles kicking in. If you look to a time frame, maybe three to five years out, I think longer into the future, there is no visibility. There is strong indications that automotive applications will take as much as 40% or 50% of the total market. Of course, 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, 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, according to the specification, the target specification and the results we have in our laboratories, we see very strong customer interest. Over the next half year to one year, we would then see that confirmed from customers. Within the time frame of a year, we should see that confirmed.
Very helpful. Thank you, Felix.
Now we come to the next questioner. It is Juergen Bachner from MainFirst Bank.
Good afternoon. Thank you for taking my question. I have a follow-up on OLED. You mentioned that it's a multi-step process. What are the total costs you carry in your P&L at the moment, and what will that be in 2019? The second question would be How much is estimating VCSEL laser equipment in your current order guidance for the full year? Thank you.
Yes, we mentioned it's a multi-step. From a small substrate to scaling and at a later stage then becoming a volume line from a customer. We are expecting for the year 2018, a cost ticket for all in our P&L around EUR 25 million, 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. It is too early to quantify how much that would be. The reduction would simply be due to the fact that certain elements of the development have been completed, and we would see 2019 also beginning a revenue stream against that.
Okay.
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 the, in the end, the final use of the tool. In terms of laser application, our backlog is between, I would say 35%-45%, in that range, is our backlog dedicated for this laser application.
Okay. Thank you.
Before we come to the next question, I would like to remind you, if you have a question, please press 9 and the star key on your telephone keypad. We come to the next questioner. It is Guenther Hollfelder from Baader Helvea.
Yeah, many thanks. Just two brief follow-up questions. One, also on the structure of your order intake. Did you expect changes here 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. This quarter, for example, we had more impacts by red-orange-yellow LED order intake than the quarter before. Still we had a relatively high area for intake for lasers, 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. Definitely, the level is significantly lower than the opto part. 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.
Okay.
gallium nitride is definitely maybe from the shorter term probably you're right, it's will be coming slightly sooner.
second to 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.
The follow-up question comes from Janardhan Menon from Liberum.
I just had a follow-up on the OLED comment that you made that your OpEx, your R&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? On a separate topic on Micro-LED, has your view changed at all? Because in terms of the timing of that, the introduction of, say, Micro-LED TVs, there's been some noise from people like Samsung on that. 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 three to six months in terms of how the potential customers are developing the technology?
Thank you for the question. Let us get started with the OLED topic, right? Yes, we would expect a lower OpEx. Also if we receive another order, 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. Receiving now a follow-on order for gradually scaling. 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 break-even and then turning into profit. If we would not get a follow-on order, as stated previously, we would then not continue the OLED activity. We will not accept that this would continually just be a cash and a cost drain.
However, we have no signs that things may not develop as we expect them to develop. Just to reiterate what would happen in case a follow-on order should not be coming.
Understood.
Janardhan, 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 Micro-LED into, let's say, a volume market has changed, meaning that I think this is still something between three to five 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 Micro-LED. 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.
This is all areas we want or we need to develop. I think in terms of this positioning activities and the supply chain of these companies has become, I would say, in the last three months, more active and getting more pushed by the end customer. Our activities in these areas has also increased because we are providing a essential production step to the Micro-LED, and it is also essential to the cost basis and the performance. Our activities internally here with customers who are in the supply chain for Micro-LEDs have indeed increased over the last month. I think the overall timeline until this gets in high volume manufacturing and getting really into larger volume, this is definitely, I would say, unchanged, meaning three to five 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.