The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to AIXTRON's Q2 and first half 2017 results conference call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, Vice President of Investor Relations and Corporate Communications at AIXTRON for opening remarks and introductions.
Thank you, operator. Let me start by welcoming you all to AIXTRON's Q2 and first half 2017 results conference call. I'd like to welcome our CEO, Kim Schindelhauer, as well as our VP Finance Administration, Charles Russell, and our COO, Dr. Bernd Schulte. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcast without express permission. Your participation in this call implies your consent to this recording. Please be informed that our safe harbor statement on slide two of our results presentation applies throughout this conference call. You may also wish to have a look at our latest IR master presentation, which includes additional information on AIXTRON's market and its 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 Kim Schindelhauer, AIXTRON CEO, for opening remarks. Kim Schindelhauer?
Thank you, Guido, and welcome to all of you to the presentation of our Q2 2017 results. I will give you first an overview of the key developments in Q2, and then hand over to Charles Russell, our VP Finance Administration, who will go through with you through the financials in detail, followed by Bernd Schulte, who will give you some insight on our product portfolio. I will then close off the presentation with a summary of the broader business issues we are addressing and how we see our business prospects going forward. Let me start by making some general comments about our guidance for 2017 on slide three. At our Q1 call in April, we confirmed the financial guidance for 2017 with annual revenues and orders to be between EUR 180 million and EUR 210 million.
Due to the positive development in order intake and revenues, we now expect revenues and order intake for 2017 to be between EUR 210 million and EUR 230 million. Let me highlight some key results from Q2. In the second quarter, we booked an order intake of EUR 66.6 million, which was 8% higher than the previous quarter. The revenues of EUR 61 million were even 13% higher than previous quarter. Revenues for the first half of the year totaled EUR 114 million, which were more than double of the EUR 56 million generated in the same period last year. This is reflecting the demand for our equipment for the production of VCSEL, red, orange, yellow, and specialty LEDs, as well as power electronics and flash memory applications. I would like to give you some additional information on some Q2 events on slide four.
In June, we announced that Dr. Felix Grawert will join AIXTRON's Executive Board. I'm pleased to inform you that he will already start on August 14, 2017. The Supervisory Board has extended the contract of Dr. Bernd Schulte until 2021. Dr. Schulte and Dr. Grawert will lead the company together. I'm convinced that both will be successful, develop AIXTRON's product portfolio and exploiting their respective revenue potentials. I personally will leave the Executive Board on September 1st, 2017, and return to my original position as Chairman of the Supervisory Board. We entered into an agreement with Eugene Technology Inc., a subsidiary of Eugene Technology Limited, South Korea, for the asset sale of our ALD and CVD memory product line. The agreed purchase price is between $45 million and $55 million US, which will be fully paid in cash upon closing.
Depending on regulatory approvals, including CFIUS, we expect the closing before the end of this year. This is a further step forward in our ongoing effort to transform our product portfolio in order to reduce R&D spending, while at the same time retaining future opportunities. We believe that Eugene Technology is well positioned to continue investing in and servicing our memory customers, considering that the largest customer of this business is also based in South Korea. We decided to freeze our activities for Thin-Film Encapsulation. This led to a one-time write-down of EUR 6.4 million. In addition to the above, we founded APEVA SE, 100% subsidiary of AIXTRON for our OLED activities. AIXTRON employees which were working in the OLED product line will be transferred into this company on October 1st of this year.
This is an important step to allow a potential joint venture partner to invest into our OLED activities. We continue to transform the company to align R&D expenses with revenues in order to return to profitability in 2018. Let me now hand over to Charles for a more detailed overview of the Q2 2017 results. Please, Charles.
Thanks, Kim, and hello to everyone. Turning to slide five, let me start by saying that I will focus my comments on our adjusted Q2 results rather than on the results of the half year. Order intake in Q2 of EUR 67 million was up 8% on the EUR 62 million in the first quarter and was 30% higher than the EUR 51 million in the same quarter last year. This growth means that we ended the second quarter with an order backlog of EUR 93 million, higher than both the EUR 86 million year-ago figure and the Q1 2017 backlog of EUR 88 million. The choices we are making to reduce R&D activities in some areas will result in reduced spending in R&D during the second half of the year and beyond. Meanwhile, earnings are negative in both the second quarter, at minus EUR 3.7 million, and half year at minus EUR 10.4 million.
Moving to the next slide, let me take you through the income statement for Q2. Total revenues recorded during the second quarter of 2017 of EUR 61 million improved from EUR 53.6 million in the first quarter and EUR 34 million in the same period last year. Gross margin was 26%, which was slightly below the 27% we achieved in the first quarter. As we previously indicated, gross profit in Q2, as well as in Q1, was adversely affected by low-margin shipments from AIX R6 inventories. Future shipments should reflect a more normal sales mix. The reported gross profit is after a write-down of EUR 1.3 million related to the freezing of our TFE activities. Operating expenses totaled EUR 19.6 million in Q2, slightly lower than Q1, but higher than Q2 2016.
The year-on-year increase in OpEx from EUR 18 million in Q2 last year to EUR 19.6 million in Q2 this year was mainly caused by phasing of R&D project spending and currency movements. The reported OpEx includes restructuring costs of EUR 6.4 million related mainly to the freezing of TFE and the sale of ALD CVD activities. EBIT for the second quarter of minus EUR 3.6 million was a 39% improvement over the minus EUR 5.9 million of Q1 and substantially better than the minus EUR 11.1 million of Q2 2016. The net result for Q2 2017 was minus EUR 3.7 million, also an improvement over the previous quarter and better than the minus EUR 11.1 million we recorded in the second quarter last year. Moving to slide seven, which shows our cash flow statement. Cash flows continue to be positive, mainly because of increased advance payments from customers and the AIX R6 sales from inventories.
Collections of receivables from customers also contribute to the cash flow, with 33 days sales outstanding at the end of the half year. Turning to the next slide, our balance sheet. AIXTRON continues to have a strong balance sheet with equity of EUR 340 million and cash of EUR 197 million and an equity ratio of 82%. Inventories at EUR 36 million are at a very low level, even if you include the EUR 8.3 million ALD CVD inventory held for sale. At the end of the quarter, inventories are fully financed by advance payments received from customers and payables due to suppliers. In summary, our numbers reflect improved demand for our technologies, a balancing of our R&D expenditure, and that we are making progress in our return to sustainable profitability. Now let me hand you over to Bernd, who will talk about our technology portfolio on slides nine and 10.
Thank you, Charles, and a warm welcome to everybody. Let me start by explaining our rationale why we have frozen our thin film encapsulation, or TFE product line, for the time being. As we announced, we are concentrating on our core business and review all other business in order to achieve their financial self-sufficiency independent from the core business. With that, we consider the following four options. We either continue the product line as it is self-sufficient, we sell it as we did with memory, or we select a partner for the product line to co-finance the R&D activities as we intend to do it for OLEDs. Finally, we freeze or stop the activity as we did for TFOS as well for TFE product line.
At AIXTRON, we have decided to currently not invest further into this technology as we have not seen sufficient progress in customer traction. We could revitalize the product once we see tangible market opportunities, or we could find other solutions. Although we see in the first half of 2017 stronger demand for our CVD technology for the production of 3D NAND flash memory, we are convinced that selling the ALD CVD memory product line to Eugene Technology represents the best solution for growing its market opportunities, as previously mentioned by Kim. Our OLED deposition technology has reached an important technical milestone with the order received from one of the world's largest display manufacturers to develop and deliver a Gen 2 pre-production tool.
Our technology has passed the feasibility stage with our Gen 1 system on site, and the Gen 2 will be installed and integrated into our customer's pre-production OLED line in Q4 2017. Following intensive testing of the technology, by the middle of next year, the customer may decide to continue to invest in OVPD technology with a production tool. Depending on the number of layers addressed, such potential orders could have volumes of EUR 100 million-EUR 200 million each. We are looking for a partner for the development of this technology to provide the ongoing R&D spending and the working capital of such large order volume and required investment to that point. Let me now come to our core business of photonics and power electronics. In photonics, we are currently seeing two major drivers of demand, red, orange, yellow LEDs, and VCSELs.
In the area of so-called fine-pitch displays, demand, in particular for red LEDs to complement blue and green LEDs, is currently quite high. Fine-pitch displays are comparable to small versions of stadium-type displays using smaller LEDs for each color pixel. As an example, these bright displays can be used as advertisement displays in shopping centers. Another demand driver are VCSELs or vertical cavity surface-emitting lasers, for which we are seeing strong interest from our customers. These lasers enable 3D sensing functionalities, which we are likely to see offered in premium mobile phones in the near future. These will in turn enable a whole range of new personalized services for mobile users. This technology can also be used in autonomous cars or other devices. AIXTRON is very well positioned in this area to provide the necessary MOCVD equipment for producing such sophisticated laser devices.
We believe 3D sensing could be the next mega application, revolutionizing internet shopping by measuring and transmitting data of real objects into the virtual space, enabling new concepts of individualization of internet business. This is the next stage towards the Internet of Things, our customers and we are playing a decisive role in this development. This in turn fits to our own strategy that AIXTRON technologies are enablers for mega tech trends, including the move to renewable energy, Internet of Things, and the electrification of transportation, all of which require growing amounts of increasingly complex semiconductors for gallium nitride and silicon carbide power management and optoelectronic devices such as sensors or RF transmitters. How big the opportunity in power electronics could be can be gauged from some of the research work being done by some of the leading market research institutes.
For instance, IHS expects the market for wide bandgap gallium nitride and silicon carbide-based power management devices to grow from 331 million shipped units in 2016 to 2 billion shipped units in 2025. This is a core focus area for AIXTRON. With that, I thank you for your attention. Let me now hand back to Kim for his conclusions.
Thank you, Bernd. Before we answer your questions, I would like to summarize the operational points we have presented to you today. We have had a very good start into 2017 in terms of orders and revenues, and we are seeing a broad-based customer interest in our technology offerings and especially our solutions around specialty LEDs, VCSELs for 3D sensors, as well as power electronics. We expect this interest to be reflected in corresponding orders and revenues in the coming quarters. However, we still have work ahead of us. Our goal is to return to profitability in 2018.
To achieve that, we need to continue our work on improving efficiencies, particularly around R&D, which is a substantial part of our cost base. For that, we are establishing a joint venture for our OLED product line, and we have executed important measures by freezing our TFOS and TFE activities and selling our ALD CVD memory product line, presuming regulatory approval. The ongoing execution of our portfolio strategy might still have some substantial influence on our results for this year. Therefore, we cannot offer guidance on EBITDA, EBIT, and net results for 2017. As a consequence of the demand in our targeted end markets, we are increasing our revenues and order guidance range for this year to EUR 210 million-EUR 230 million. We expect to achieve a positive cash flow in 2017 and to achieve a positive EBIT for full year 2018.
As this is my last earnings call in my current function, I would like to thank all AIXTRON employees for their exceptional work, as well as all shareholders for their trust they are continuing to show in all of us at AIXTRON. I firmly believe that Dr. Schulte and Dr. Grawert will be leading the company into a successful future. Finally, let me assure you that we are well on our way of building a business with the kind of flexibility and resilience that will enable AIXTRON to deliver cutting-edge production technology solutions to markets with growth potential, and therefore deliver significant shareholder value in the coming years. With that, let me hand over to Guido for your Q&A. Thank you, Kim, Bernd, and Charles. Operator, we will now take the questions, please.
Ladies and gentlemen, if you would like to ask a question, please press nine star on your telephone keypad. In case you wish to cancel the question, press nine star again. Please press nine star now to pose a question. The first question comes from Johannes Ries from Apus Capital. Please go ahead.
Yes, good afternoon. Coming back to this VCSEL topics, this VCSEL laser, which together with the 3D sensing, maybe offers a really huge opportunity. Just heard from the call of ams in the morning that they plan to build a new fab in Singapore, investing EUR 100 million to build their own high-end VCSEL lasers, but also seeing huge demand for lower end, which are maybe used in foundries. They will buy from foundries. It looks like maybe Apple is a leader, but Android will follow. There are also a lot of applications outside the traditional handset space in industrial and automotive in autonomous driving. Therefore, how big is the opportunity for you, and is that the biggest driver of the company going forward?
This is Bernd Schulte. Hello. Certainly, it's an important driver, but I wouldn't say it's the biggest driver. It is a driver, and I think it is a very solid business, and we have a very good position for this business in terms of market position. However, I wouldn't call it the biggest, but it is certainly very important.
It's something which could maybe lead to growth in the coming years because the end market is growing in the coming years heavily.
Certainly, the market in itself will grow going forward in the next one to three years. Definitely, it is an important market, but it's not the biggest opportunity we see at the moment.
What would you count the biggest one?
Well, I think on the long run, it's definitely power electronics.
Power electronics. On the OLED planned joint venture, could we expect a closing in the second half?
This is Kim Schindelhauer . We are working on that. Definitely. We established the APEVA SE here in Germany, we are also in process of founding the Korean mother company of that. That enables the investors to invest into that Korean company as a joint venture. We are planning or we are working on it to work towards the end of this year. Timing is definitely an issue. Cross our fingers that this all will work out.
The closing of the ALD CVD deal, when is it planned? Remind me, Q3 or is it Q4?
This is Kim Schindelhauer again. I think it is more Q4 because just a week ago, we put in our request for CFIUS approval. Of course, 75-day [T-plus] is maximum running, maybe extended. We are in Q4 already. Therefore I expect the closing in Q4.
Maybe a more financial question at the end. The dollar, how much it impacted you maybe going forward negatively? How much you have hedged, and how big is this open position? Would look next year if you maybe execute all the things you talked about?
We don't hedge the dollar/euro. We have around 70% of our sales denominated in EUR.
Yep.
It hasn't affected us in the first half because the exchange rates didn't change till very late in June. We would expect to have an effect based on the level of sales in EUR and the margins that you're seeing in the gross margin.
Okay, thanks.
There's another question that comes from Uwe Schupp from Deutsche Bank.
Yeah, thank you. Good afternoon, gentlemen. Two or three questions, please. First question would be on the order guidance for the year. You're guiding EUR 210 million to EUR 230 million now, obviously, but you already had roughly, if I'm not mistaken, EUR 130 million at H1. What is the implied reason for the slowdown there? If you could help us understand that a bit better. Is it purely related to the memory business potentially? Are there reasons behind, given that you indicate that orders will be staying at reasonably high levels from here? Second, in terms of the VCSEL business again, how much of the mix is that roughly? Is it dominating the orders that you saw in Q2, just as an example, or in H1? Or is it, I don't know, half of the business? Just an indication would be very helpful.
I know you typically don't split it out by orders. Thirdly, we've heard major capacity announcements from IQE last week, with ams today. We hear more VCSEL capacity being built out in Asia because obviously all the Android supply chain is now also looking at this space, apparently. How far do you think competition is ahead with a competitive tool? Right now it looks like you're pretty much the go-to company when it comes to VCSEL manufacturing. Just any thoughts about competition here would be helpful. Thank you.
Yeah, this is Bernd Schulte. Hello, Schupp. Regarding the orders and the expectations going forward, I think you mentioned it already. You have to consider that we currently assume that our memory business is not basically contributing to neither sales nor order intake in the fourth quarter. That's an assumption we have to make to be logical in just the statement, which Kim Schindelhauer just mentioned. That is the reason simply why we're seeing certainly a lower order intake in the last quarter. The second thing, you always know we have a certain prudent view that definitely we should do. You're also right that we do not split up exactly what systems we are basically selling in very detailed applications. Nevertheless, just to put this in the right context, I think the VCSEL business, as I said, it is important, but it's by far not the biggest one.
Currently, the biggest one is, I mentioned, it's really systems for red, orange, yellow LEDs. This is in terms of the opto part, really the biggest portion. VCSEL is pretty much something we expect to see another investment to come for maybe the rest of the year or next year. Your third question was about the various companies making announcements and our competitive situation. Certainly, you are right. We have, in the moment, a very strong position, and considering the fact that a VCSEL device is a fairly complex device which require quite some time to qualify on a tool and to optimize, we do not see a change in that position in short term. It's very difficult to speculate on long term, but in short term, definitely, I think we do not expect a change in our position.
Very clear. Thank you very much.
Next question comes from Janardan Menon from Liberum.
Hi, good afternoon. Thanks for taking the question. I have a few. One is your adjusted OpEx in Q2 had a run rate of around EUR 20 million, EUR 21 million. I was just wondering, one, how that will trend in the second half as some of the TFE and TFOS costs fall off. If you assume that you get an ideal situation on OLED in the JV, then what is the annualized run rate that we can expect at some point next year when all of that is finalized? I have a couple of follow-ups.
It's Charles here. We expect the costs to reduce as the closing of the ALD CVD transaction takes place because a number of the engineers for TFOS and TFE will be working up until that point to assist with that transfer to Eugene Technology. We're expecting on an annualized basis that, I think we said last time, the TFOS was around EUR 8 million a year in terms of R&D spend, and TFE around
EUR 3 million-EUR 4 million annualized of R&D spend.
The ALD CVD itself is how much?
The ALD CVD is probably a wash with the margin that departs when the business moves to Eugene Tech.
Okay. Overall, can you give any indication right now where, once OLED is in a JV, where your OpEx could end up?
That depends on the proportion of the JV which belongs to us. Obviously, if it's 50-50, we'll lose half of the OLED costs or the OLED results to a partner. It depends. We don't actually know what that figure's going to be at the moment, so we can't give you any guidance on that right now.
Okay. Just moving on the red, orange, yellow LED. Is that in LEDs or are you categorizing that in OPTO?
No, that's in LED.
LED. That's still 44% of your revenue in the first half, the overall LED segment. I was just wondering, can we count on that as a growth area? Because you're saying that that is display, fine-pitch displays, and things like that. Are you confident that that will be a growth area? And how much of that revenue is still the sort of standard blue LEDs, and will that fall off in coming quarters as your inventory of R6 ends?
Yeah, I think you said it rightly. In the first half, you have a significant portion regarding to gallium nitride R6 related business, which was the sell-off of our inventory. I think we discussed this quite some time. I would guess that more than 50% of first half revenue is for that. In the second half where we most likely will not see this effect, this overall number is expected to come down percentage-wise.
Your full year revenue guidance obviously assumes a big jump in all the other areas to compensate for that and the CVD, ALD loss effectively.
Yes.
Got it. Understood. Thank you very much.
Next question comes from Günter Heufelder, from Baader Bank.
Yeah, thank you. Just a follow-up on the VCSEL questions. Given the investments also into 100 gig technology over the past months, I think also reflected in your order backlog or order intake in the second half of 2016. Do you see any digestion phase in the VCSEL area right now, or is it sort of a smooth transition to other applications like 3D sensing?
No, I wouldn't call it a digestion. I think it is more a phase where we should all be aware we do not have seen the end product on the market yet. I think that is an important step to get them really on the market and see how the end user is accepting it. These capacities for the first initiate product launch, that's of course installed for quite some time already. We have to see now how this is accepted and how fast other telephone makers are following this application. Definitely it's not a digestion.
Okay. Can you say how many employees you are moving to Apeva?
We are moving 71 people to Apeva.
Yep. The last question would be on the shippable order backlog. I thought at the end of Q1, you had like a EUR 76 million shippable. Now you're saying that basically your whole order backlog is shippable in 2017. Is this related to Trinas, or what's the reason behind here?
I don't think we've said that the entire backlog is shippable in 2017 because we're saying it's EUR 70 million, and the backlog is EUR 93 million.
Okay. Sorry, I didn't see this. Thank you.
Next question comes from Michael Schlemmer from Warburg Research.
Yes, good afternoon. One follow-up on the VCSELs again. Assuming that maybe the Android platform would not be ready to copy the feature, this 3D sensing feature in 2018, maybe there's a risk even for 2019 as potentially Apple is a couple of months or years, even years ahead on the software side. Would you say then there's a risk regarding the VCSEL business for the next one to two years until then maybe additional volumes pick up later, maybe 2019, 2020?
That is very hard to comment from me honestly. Please remember, we are in the food chain at the very beginning, now you talk about the food chain going through various steps to the other side. That's very hard for me to comment.
Okay. Maybe coming from your side on your power electronics business, how do you see the pipeline developing at the moment? Do you see some acceleration to take place? What's your view?
No, I don't see an acceleration right now. Indeed, I think for gallium nitride, our customers are basically sampling with their customers, and that situation has not really resulted into real products, which we see really requiring more demand of wafers. That is something we have really to see to get real traction. There is more traction in the area of silicon carbide, where capacities have to be ramped up. Nevertheless, we also should keep in mind all these volumes are rather small compared to business like LED or VCSEL today. We expect this to grow in the next two, three years to much more significant volumes.
Yeah. Okay. Last question on the financials. Some things we should consider in the second half regarding working capital development?
Well, I wouldn't expect 33-day sales outstanding to continue. I think I said last time 50 was a reasonable number. Other than that, I think it should be relatively stable.
Yep. Okay, thanks.
There are no further questions, I hand over back to the spokesman.
Thank you. As the operator said, no more questions in the queue. We are now closing our Q2 results conference call. Thank you for your participation and your interest. You know where to find us if you have any follow-up questions. Thank you. Bye-bye.
The conference is no longer being recorded.