Conference is now being recorded. Ladies and gentlemen, welcome to AIXTRON's Q3 2017 results conference call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, VP of Investor Relations and Corporate Communications at AIXTRON for opening remarks and introductions.
Thank you, operator. Let me start by welcoming you all to our Q3 2017 results conference call. I'd like to welcome our executive board, 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 contain the usual safe harbor statement. I will therefore not read it out loud, but would like to point out that it applies throughout this conference call.
You may also wish to have a look at our latest IR presentation, which includes additional, often new information on AIXTRON's markets and its technologies and is available on our website. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or transcript on our website at some point after the call. I would now like to hand you over to Dr. Bernd Schulte for opening remarks marked on slide number three.
Thanks a lot, Guido, and welcome to the presentation of AIXTRON's Q3 2017 results. I'd like to start with an overview of the major developments in Q3 before handing over to Felix Grawert, my new colleague in the AIXTRON management board, who will introduce himself and give you more insight around our priorities in the coming quarters. This will be followed by Charles Russell, our Vice President of Finance and Administration, who will guide you through our nine-month financials. I will come back to you with a summary of our general business prospects. We delivered a solid Q3 with revenues of over EUR 62 million and an order intake in excess of EUR 69 million. Those were stronger than the previous quarter, which reflects the demand for our MOCVD solutions, in particular for the production of lasers for 3D sensing and Datacom, as well as red, orange, yellow, and specialty LEDs.
We have announced recently that we have received a significant order from IQE, one of the key suppliers in the field of VCSELs, underlining the dynamics in this market. We're also becoming excited about our opportunities in the power electronics area, which Felix will go into more detail later. Now to slide four, our guidance. Given the increased demand across most of our markets for the second time this year, we are able to raise our guidance. Now we have refined our guidance for 2017 revenues to the upper ends to be in between EUR 220 million and EUR 230 million, and we have raised our order intake guidance to a range of EUR 240 million and EUR 260 million. We announced in the previous quarter that we have entered into an agreement with Eugene Technology in South Korea for the sale of our ALD and CVD memory product line.
We received the approval for that transaction by officials early this week. With this, we believe that the transaction will be closed this year, and this puts us in a position to forecast a break-even on EBIT level for 2017. Regarding our OLED activities, we have established APEVA, our OLED subsidiary, where we are seeking a joint venture partner to share both the risks and the rewards of what we believe is a very big market opportunity. Now, I'm very happy to introduce you to Dr. Felix Grawert, who joined me on the AIXTRON executive board in August. I'm very much enjoying working with him, and we are both convinced that we have a team in place which can deliver substantial shareholder value in the coming years. Felix?
Many thanks, Bernd, and welcome from my side as well. Since this is the first time that I'm talking to you, I would like to share with you my initial impressions on AIXTRON and on our strategic priorities in the coming quarters. In terms of my background, I spent the last four years at Infineon, where I headed the business of high voltage power transistors. Prior to that, I worked as a consultant at McKinsey & Company in the areas of semiconductors and industrial high tech. Through my work in both these companies, I got to know AIXTRON, and having been a customer of AIXTRON for a number of years, I'm deeply convinced of the technology and the market potential of the company in the years to come.
In the last years, AIXTRON has successfully made the move beyond the commodity LED business and now addresses a number of markets of higher value that play to the strength of the company. In VCSELs, in laser diodes, and in the emerging market for power semiconductor. Our customers ask for the precision technology of highest performance. Here, AIXTRON has a lot of differentiation potential, and the excellent performance of its product creates value for its customer. We believe that our address market will grow over the coming years into a sizable business opportunity for AIXTRON. Let me take power semiconductors as an example. Today, this market relies on silicon as a material. The wide bandgap materials, gallium nitride and silicon carbide, offer a higher energy efficiency and allow for smaller form factors of the power converters.
For example, industry experts estimate that a silicon carbide-based main inverter in an electric vehicle allows a driving range that is up to 10% more than a silicon-based solution. Alternatively, the cost of the vehicle battery can be reduced by up to 10%. We see the first EV manufacturers adopting silicon carbide-based power electronics in their products today, and we expect others to follow in the future. None of us know how fast EVs will grow and the adoption of compound-based power electronics in them. Nevertheless, we believe that electrification of transportation is providing us with growth opportunities over a multiyear period. Having worked in the power electronics industry, I believe that we are at the beginning of a transition towards wide bandgap materials, and I'm convinced that AIXTRON has a sizable market opportunity in this area going forward.
AIXTRON is the technology leader in this segment today, and together with our customers, we want to shape market adoption of wide bandgap semiconductors. As announced earlier, AIXTRON is committed to return to sustainable profitability in the coming quarters, which is the number one priority for both myself and Bernd. We want to achieve this goal by maintaining or gaining segment leadership in the above-mentioned growing high-value markets. In order to achieve this, we will focus on customer value in our core segments, and we will make targeted investments in R&D to strengthen our offering, but only where the markets allow for a well-defined return of invest. Our OLED business, now in APEVA, is approaching major milestones in terms of customer qualification. Our Gen2 pilot manufacturing tool is in final assembly at the customer and will be ready for testing by the customer this year.
We are in discussions with potential joint venture partners in Asia for this business. With this, I thank you for your attention. Let me hand back to Charles, who will go through our Q3 numbers in detail.
Thanks, Felix, and hello to everyone. Turning to slide six, our key financials, let me first explain the adjustments we have made. These remove two effects, which do not relate to our continuing business activities. Firstly, in the quarter, we received payment for a shipment made in prior years, which has had a positive effect of EUR 4.9 million on order intake and EUR 4.6 million on those revenues and margins. Secondly, we have EUR 1.4 million in restructuring costs, mainly related to the sale of the ALD and CVD product lines. Turning now to the adjusted values. Orders received in Q3 of EUR 64.5 million continued the strong trend we have seen on order intake in recent quarters. On a year-to-date basis, we generated EUR 193 million in orders, giving a good indication of the positive progress we are making in our core markets.
The strong order intake means that we ended the third quarter with an order backlog for equipment of EUR 99 million, 6% higher than the Q2 2017 backlog. Revenues during the third quarter of 2017 were EUR 58 million, compared with EUR 61 million in the second quarter. The change reflecting exchange rate movements. The comparable for Q3 2016 was EUR 51 million. Moving to page seven, you will see that our gross margin improved from 26% in Q2 to 35% in the third quarter. The improved gross margin is due to a better product mix and the absence of low-margin sales, which affected the first half year. OpEx of just under EUR 19 million still include the costs of the ALD CVD business, the sale of which we expect to close in Q4 2017. In the quarter, we achieved an EBIT profit of EUR 1.4 million and a net profit of EUR 1.1 million.
Moving to page eight, which shows our cash flow statement for the first nine months of 2017, as well as the third quarter. On both a quarterly and nine-month basis, we generated a positive cash flow from operating activities, EUR 56 million year-to-date, compared with minus EUR 35 million in the year-ago period. In the quarter, EUR 13 million compared with EUR 9 million in Q2. The quarterly positive cash flow is largely due to the profit and advanced payments received from customers. Turning to the next slide, our balance sheet. Inventories have been cleared of slow-moving items and at EUR 40 million, represent over four inventory turns. Receivables for EUR 21 million remain at a very good level and are the equivalent of 31 days sales outstanding. You will also see the continuing growth in advance payments from customers, which now total EUR 42 million.
Our positive cash flow explains the growth in cash from EUR 197 million last quarter to EUR 204 million this quarter. With that, let me hand you back to Bernd.
Thank you, Charles. Going forward, the major short-term growth driver will be around our MOCVD technology across specialty LEDs and laser applications. In the midterm, the emergence of wide bandgap semiconductor power electronics applications represents a growing opportunity for us. With the approval from CFIUS and the anticipation that the sale of our memory business will be closed in 2017, we expect to achieve EBIT breakeven for 2017 and continue to expect to generate a positive free cash flow for the year. We are in discussions with potential partners for TIBA. In addition, we are well on track to improve our margins and to optimize OpEx and align them with the revenues we generate. We are clearly focused on returning to profitability next year, which requires us to remain disciplined about cost and cash flow.
Finally, we are very confident in our strategy in focusing on our core technologies, and we believe that we are well positioned to take advantage of the opportunities we are seeing in front of us. Compound semiconductors, carbon nanomaterials, and OLEDs. I would like to thank you for your attention, and with that, I'll pass you back to Guido before we take some questions.
Thank you, Bernd, Felix, and Charles. The operator will now take the questions, please.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press Star 9 on your telephone keypad. In case you wish to cancel your request, please press Star 9 again. Please press Star 9 to state your questions. The first questioner is Janardan Menon from Liberum. May we have your questions, please?
Hi, good afternoon. Thanks for taking my question. I have a couple. One is, you said you've taken some orders for VCSELs, and you talked publicly about the IQE orders. The general view in the industry is that large North American smartphone vendor who's currently using 3D sensing will spread this across the entire model range by the second half of next year, which would, in most cases, require a doubling of volume or perhaps even higher than that for all 3D sensing components, including VCSEL arrays. I was just wondering, is that a view that you share? If so, should we not expect orders for that additional capacity to come on board sooner rather than later? Is there any reason why such orders may not come in any such magnitude over this period of time?
Also while on the order side, in your presentations, et cetera, you talk about things like micro-LEDs as well as silicon carbide, gallium nitride, which is perhaps slightly more longer term. Once again, do you think these are opportunities which could become converted to orders in 2018 or in any significant way, or is it more sort of beyond that?
Yeah, thank you for the question. This is Bernd. Certainly we are positive about the laser application, particularly the VCSEL. I can share with you that about 60% of our order intake in this quarter was into laser application, not only VCSEL but overall laser application. This is a very positive movement right now, and we also believe this is going to continue into next year. The detail, of course, you know that we cannot share the exact numbers. Nevertheless, we are positive about VCSEL, and as I mentioned in my speech, yeah, we are very excited about this, and that is certainly one of the drivers of our current business and the business in the coming quarters.
Would you therefore think that your order levels at some point can rise from current levels, or is that too difficult to predict at this point in time?
It's quite difficult to predict. As I told you, the current order level already includes quite some impact from that market growth.
Understood. On the other applications like micro-LEDs, gallium nitride, et cetera?
Let me speak quickly about micro-LED, then Felix will come back on the power electronics area. Micro-LED definitely is something from the mid to longer term. Certainly we're selling a few tools here and there more or less for qualification purposes for customers. The major technical challenge here is in the mass transfer of LEDs, which is not related to the epi growth, which is our part of the business. What I'm hearing, and I'm hearing the same thing probably as you, there is quite some technical challenge, and I do not expect a volume ramp for micro-LEDs within short term. Nevertheless, there is, and sometimes there is some confusion. There is certainly the business of the so-called fine pitch displays, which we have to differentiate from micro-LED.
These are very small LEDs, but significantly bigger than micro-LEDs, which still using traditional transfer, and they are used for, let's say, 150-inch diameter displays, mainly in commercial applications. That is certainly a driver of the business today, and mainly for red LED, but also for green.
Well, let me add from my side, this is Felix speaking, about the power electronics side. We currently see a lot of very strong momentum for the market of silicon carbide MOSFET. This is the range 600 volt, 1200, 17, 3.3 kilovolt. Main application is going to some part in the automotive. This is the automotive main inverter. This is the onboard charger. This is electric vehicle charging, and this is also photovoltaic. We see that the whole industry is massively moving in that direction. We are expecting also strong momentum going forward in the next few years. Customers are currently in the development phase of these products. We see that product find in the year 2018, first market adoption. We all know the power electronics industry and the automotive industry is a relatively slow-moving industry if we compare this with the consumer electronics industry.
We are now positioning ourselves, getting tools into all the different customers, making sure that if in the years 2019, 2021, the real volume orders come, we are well placed. That is the market for silicon carbide, very strong momentum. The other market in the power arena is the gallium nitride. Here we have to differentiate between the gallium nitride RF market, which is used, for example, for radio base station. A market already very strong and continuing to grow. AIXTRON very well positioned with a number of customers. Continues to grow. Whereas the market for gallium nitride power devices, 100 to 600 volts, it's moving a little further out, is having a little softer start than the industry overall was expecting. Still, in the next couple of years, is expected to be strong.
Understood. Just a quick follow-up. Some companies in silicon carbide, like Wolfspeed, have publicly said that they will double capacity by the end of next year. II-VI has also said that they're committing a lot of CapEx to increasing capacity. Are you beginning to see the effects of that on your order book already, or is that something yet to come?
Yes, we definitely see that.
Understood. Thank you very much.
The next questions come from Ghasi Tazi from Oddo. Over to you, Mr. Tazi.
Yeah. Thank you for squeezing me in. Just a follow-up on the power semiconductors. I understand that on the silicon carbide and on gallium nitride, we are probably better positioned on gallium nitride. In silicon carbide, who are the main competitors and what is really your share in this business? I guess Tokyo Electron's in this market as well.
The key competitors in the silicon carbide tool market is Cree, is LPE and is Nuflare. Just the main three of them. As of current installed base, AIXTRON is proportional to the number of tools. We have made significant advances in performance over the summer of 2017, and it's our plan going forward to capture now a leadership position in it.
Okay. In the orders you mentioned, the 60% related to laser. The 40%, was there already orders in power semiconductors, or can you give a rough indication where this 40% were mainly related to?
The other 40% have been mainly related to LED applications and others. I think power electronics, there has been some. Don't forget, we still have in Q3 our silicon business, where we deliver tools for memory applications to memory makers.
Looking at your order guidance, that implies roughly EUR 50 million plus EUR 6 million in Q4. Is that a clean number without the memory business?
It is.
On the financials, the OpEx run rate, it was roughly EUR 18 million something in Q3. If I get that correct, you mentioned around EUR 1 million restructuring expenses. Let's say EUR 17 million. Is that a realistic run rate going into Q4 and into next year, or are still cost savings kicking in?
With the Charles Russell OpEx in Q3 and the beginning of Q4 will still continue to contain the ALD CVD OpEx, which stops at the point of close, which is sometime during Q4, so expected to be lower in 2018. With respect to the ALD CVD, we expect it to be zero. There are lumpiness in the other activity which may or may not change quarter-on-quarter. Overall, we expect it to be reduced by the ALD CVD activity.
Okay. What would be a good proxy quarterly run rate going really into next year? What should we model with in terms of OpEx?
I don't think we've given any guidance on that at all ever. I think it's just wait and see at the moment. We don't really want to give any guidance on the 2018 numbers at the moment except profitability of it.
It's not really a guidance, given that a lot of moving parts are still there, just really to get a feeling for the underlying OpEx run rate. I mean, not as a guidance.
I think it's a little bit too early to give this information. Keep in mind that we still are in discussion here with regard to APEVA. The timing in itself has quite some influence on that. Please understand that we need some time to clarify and then we certainly answer this question.
No problem. One final question. The extra or the one-off gain with the customer now paying for a delivery in the past, a little bit color around that. Who was the customer? What was the background on that?
I mean, I certainly cannot name the customer. You will understand that, but I tell you the story. Well, we booked order intake and took the shipment in 2013. We had, over the time, some concerns about the ability of the customer that we can collect the payments. As a consequence, we have taken these systems out of the backlog and therefore also corrected the order intake. Now having received all outstanding payments, we were able to book the full revenue and had also the order intake accordingly.
We didn't actually book the order intake before, which is why we booked it now. The revenue was deferred because we're not allowed to take revenue if we do not expect to receive the payment.
Okay, great. Thank you.
The next questioner is Günther Hollfelder from Baader HelveaV.
Question on the silicon business. I think it was like EUR 11 million sales in the third quarter. Was this basically also in line with the order intake what you had with silicon?
No, the order intake was a bit lower.
Okay. In terms of the gross margin, was there a negative impact from the silicon business in Q3? Is it below your average gross margin?
Overall, the silicon business gross margin is somewhat lower than our overall gross margin.
In Q3, it was more or less the same as the rest of the business. It was not a drag on the Q3 margin.
Okay, thanks. Last question, I think for Dr. Felix Grawert. He already talked about the competitiveness in the power semiconductor segment regarding silicon carbide. I was just wondering on the gallium nitride side where you already have a relatively strong position. How do you see the risk in a single wafer penetration on the gallium nitride side at power semiconductor makers over the next years? Based on what you saw at AIXTRON or seeing at AIXTRON right now and also, of course, competition maybe also based on your experience at Infineon, do you believe that batch systems will continue to dominate this market segment? Do you think there's a risk that single wafer might move in?
On the gallium nitride power and the gallium nitride RF, I see AIXTRON in a very strong position and especially I do see the batch tools also going forward in a very strong position. The reason being that you have relatively long process time because you talk about low growth rates and thick epi-layers. This, as I just said, by the fundamental underlying physical principles, benefits the batch reactor over single wafer tools. We see ourselves in a leadership position. We have things in the pipeline, and we see AIXTRON also in the future in the leadership position.
Let's say not on the RF then on the power side.
It's both.
Are both.
Power. Gallium nitride.
Okay.
Same underlying physics, device physics.
Both hands. Okay, thank you.
Next up is Harald Schnitzler from DZ Bank .
Yes, hello. I've got a question on the restructuring. Where do you see the break even provided you find a partner for OLED? Where would be the break even if you would fail to find a partner? Thank you.
Probably I have to give you, Harald Schnitzler, the same answer as before. I think we are still in the phase of structuring the APEVA business. As such, we are not with that information. Certainly you heard, and we will stick to this, that we plan to be profitable next year. To exactly what extent profitability means, we are not ready yet to comment.
That means, in your guidance, you assume that the OLED business has found a partner.
We assume that we will find a partner in 2018.
Thank you.
Now we come to the next questioner. It is Craig Irwin from Roth Capital. Over to you.
Hi, yes. This is Craig Irwin from Roth. The question that all of my clients have been asking me about silicon carbide is how do we quantify the market? Everybody wants to know, is this a 1,000 reactor opportunity or maybe something in the low hundreds? What would you point to for investors to dissect this market and understand the potential for AIXTRON? Sorry, Felix.
The silicon carbide market, we have to differentiate in two segments. There is an industrial segment and there is an automotive segment. The automotive segment probably outnumbering the industrial by a factor of two to five. In the end, it will depend on the penetration, first of all, and the adoption of electric vehicles as a total percentage of cars being sold, and then the adoption of silicon carbide within electric vehicles. I think we all know how big uncertainties are among those. In the end, I would assume that we talk here about several hundred, but not about several thousands of reactors. Just an order of magnitude here.
Okay. Just to clarify, several hundred reactors, is that consistent with some of the third-party analyst estimates on the market?
We have compared with those and it matches.
Okay. If we looked at those estimates and had a different view, you would say we would need to move the numbers consistent with that view.
Once again, as stated, there's very large error bars because it's really about predicting the adoption rate of electric vehicles, the percentage of total cars, and adoption of silicon carbide indeed, and I would not want to give you a guidance on these two big numbers.
Okay, excellent. Just another quick question, if I can. The G10-SiC units that you've been selling predominantly into this market, can you maybe talk about relative pricing versus similar units that you offer? Are these premium units? Do you expect the new technology that you're introducing to this market to receive a premium?
I wouldn't call it a premium. It is because these tools are typically fully automated, and that additional automation certainly comes with a higher price tag. The range can be anywhere between $2.5 million and $2.5 million.
Excellent. That's great. Thanks again. We look forward to the customer feedback on your new technology. Thanks.
Thank you.
With that, we would like to close today's call. Thank you for your interest and your questions. You know where to find us should you have any additional or follow-up questions. Have a good day, and bye-bye.
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