Good morning, ladies and gentlemen, and welcome to AIXTRON's Q1 2017 results conference call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, Director 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 Q1 2017 results conference call. Thank you for attending today's call. I'd like to welcome our CEO, Kim Schindelhauer, as well as our Chief Accounting Officer, Charles Russell, and COO, Dr. Bernd Schulte. As the operator indicated, this call is being recorded by AIXTRON and is considered copyrighted material. As such, it cannot be recorded or rebroadcast without express permission. Your participation in this call implies the consent to this recording. As with previous results conference calls, I trust that all participants have our results presentation slides, page two of which contains the usual safe harbor statement. I will therefore not read it out loud, but would like to point out that it applies throughout this conference call.
You may also wish to have a look at our latest IR presentation, which includes additional information on AIXTRON's market and its technology, 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 a transcript on our website at some point after the call. I would now like to hand you over to Kim Schindelhauer, AIXTRON's CEO, for opening remarks. Kim?
Yes, Guido. Thank you very much. Ladies and gentlemen, on behalf of AIXTRON's Executive Board, let me welcome you to the presentation of our Q1 2017 results. My name is Kim Schindelhauer. I'm the CEO of AIXTRON since March 1st this year. I'm with the company since 25 years, initially as member of the Executive Board and for the last 15 years as Chairman of the Supervisory Board. It is a pleasure to be back on the Board in an operational function now, and together with my colleague in the Executive Board, Dr. Bernd Schulte, we will guide AIXTRON into the next phase after the non-successful takeover by Fujian Grand Chip last year. Bernd will give you an update on our technology portfolio and the expected development for 2017.
Also with us today is our Chief Accounting Officer, Charles Russell, who has been with the company for more than a decade. He is responsible for accounting, financial reporting within AIXTRON. Charles will go through the results with you and answer your related questions to that. Before that, let me highlight some key results from Q1 that we state on slide three. With an order intake of EUR 61.9 million in Q1, we had another strong quarter. We had booked revenues of EUR 53.6 million and an EBIT of minus EUR 12.7 million. Included in this number are extraordinary write-downs in the amount of EUR 6.6 million, which results in an adjusted EBIT prior extraordinary write-downs of minus EUR 6.1 million.
Long time low inventory levels of EUR 49.9 million, as well as reduced operational and CapEx spending, led to a free cash flow in the quarter of EUR 33.3 million, and to a group cash position of EUR 193.6 million, a significant improvement compared to prior quarters. Charles will go into more details on that and answer your questions on that. I would like to share some additional important events with you, which happened in Q1. We received a purchase order from a large Asian display manufacturer for a OVPD deposition tool due to be delivered in Q4 2017. This is an important milestone in our OLED development program. Furthermore, we delisted from NASDAQ, and the deregistration from the SEC was completed.
As of March 20th, AIXTRON was again included in the TecDAX share index, of which we were excluded in December for the first time due to the low free float during the pending takeover transactions. In addition, the U.S. class action suit against AIXTRON was dismissed. Turning now to slide four. Based on our Q1 results and in order intake, we reiterate our full year 2017 guidance given in February 2017 with revenues and an order intake between EUR 180 million and EUR 210 million for the fiscal year 2017. We continue to expect an improvement of free cash flow in 2017 compared to 2016, and to achieve a positive EBIT in 2018. Let me now give you some background to the previously mentioned write-downs in Q1. To explain our position, I would like to ask you for a second of your time.
AIXTRON has a wide portfolio, as you know, of enabling technologies for highly diversified applications. Each application has a group of customers or a very large single customer. Each application is a completely separate market and is not competing with each other at all. This unique market position of AIXTRON to deliver the treatment for complex material, the position into different applications and/or markets are using the same core knowhow, provide unusual growth opportunities for the company. The negative side of this unique situation is that for each of these future applications, significant R&D funding is required. One solution would be to focus on less applications and spend less R&D to make the company profitable rather quickly.
It is unquestionable that the deposition of complex materials will be the future, and AIXTRON will be the only company to focus its entire knowhow towards that and support the relevant customers and markets as per their requirements. We made the decision to continue our activities in this future market, but with a more focused approach. We will organize our portfolio of future technologies and transfer them into defined independent units. For each unit, we will select technology partners at an early stage of the development to provide the required resources. These partnerships, which could be investment in R&D as well as joint ventures, will focus on specific requirements needed. This year, we will review all development programs and select solutions in order to focus our R&D spending. This will lead to a sustainable profitability and growth as a group in the following years.
As a first step of focusing our R&D spending, we froze our product development for III-V materials for future generations logic chips, the so-called TFOS. This led to an extraordinary write-down of asset in the amount of EUR 6.6 million. We will not spend further R&D until a firm timeline for the introduction of this material application has been set and a partner was found to cover the required development expenses. We are, of course, fully committed to support our customers to introduce TFOS materials to the market once this will happen. That should be my explanation to the EUR 6.6 million, and I'm more than happy to answer more questions later on. At this point now, I would like to hand over to Charles, who will give you a detailed overview of the Q1 results. Charles, please.
Thanks, Kim, and good morning to you all. Turning to slide five, let me start by saying that Q1 was, in many ways, a reasonable quarter, thanks largely to a very strong order intake at EUR 61.9 million, which was up 39% on the EUR 44.4 million we generated in the same quarter last year. This year-on-year growth means that we ended the first quarter with an increased order backlog totaling EUR 87.6 million. Despite the EUR 6.6 million write-down we decided to make in the area of our TFOS activities, we also improved profitability compared to the first quarter last year. Also, on the positive side, we generated a free cash flow of EUR 33.3 million, largely because of reductions in working capital. However, earnings remained negative in the first quarter, with net income coming in at minus EUR 13.5 million.
Moving to the next slide, let me take you through the income statement for Q1. Total revenues recorded during the first quarter of 2017 of EUR 53.6 million were up from EUR 21.4 million in the same period last year. We improved our gross margin by 10 percentage points from 15% in Q1 last year to 25% in Q1 2017. It would have been 27% had we not written down EUR 1 million of TFOS inventory assets in the quarter. Operating expenses totaled EUR 26.4 million in Q1 2017, which was higher than Q1 2016, mainly due to higher R&D expenses, including a EUR 5.6 million write-down related to our TFOS activities. Otherwise, R&D spending would have been at a normal level of EUR 14.1 million. EBIT for the first quarter came in at minus EUR 12.7 million, which was an improvement over the minus EUR 14.7 million of Q1 2016.
If we exclude the EUR 6.6 million write-down, the improvement was more pronounced with an adjusted EBIT of minus EUR 6.1 million. The net result for Q1 2017 was minus EUR 13.5 million, a slight improvement over the minus EUR 15.5 million in the first quarter last year. As you can see, the fourth quarter of 2016 was around half of 2016 annual revenues, was extraordinary both in terms of revenues and earnings, and is therefore difficult to compare. Moving to slide seven, which shows our cash flow statement for the first quarter. We had a particularly good quarter in terms of cash flows due to a strong positive operating cash flow of EUR 34.6 million, mainly resulting from collections of accounts receivable and an increase in advance payments from customers for new orders. The overall result was that we generated a total cash flow of EUR 33.3 million in Q1 2017.
A consequence, our cash balances have increased from EUR 160.1 million at the end of last year to EUR 193.6 million at the end of Q1. Turning to the next slide, our balance sheet. AIXTRON continues to have a healthy balance sheet with equity of EUR 356.7 million, cash of EUR 193.6 million, and no debt. I want to highlight two things, inventories and customer advance payments. Firstly, inventory at EUR 49.9 million is at its lowest level for 10 years and is a clear reflection of the improvements we've made in inventory management. Secondly, advance payments from customers increased to EUR 30.5 million as of March 31st, 2017, compared with EUR 26.1 million at the end of last year, reflecting the continued strong order intake recorded in Q1 2017. Let me hand you over to Bernd, who will talk about our technology portfolio on slide nine. Bernd?
Thank you, Charles, a warm welcome to everybody. Mentioned before, we had a good quarter with strong orders, backlog, and revenues. We have reached an important milestone for our OVPD technology for the deposition of organic material with the order we have secured. In Q1, Gartner has confirmed what we have already anticipated. We have been the global number one supplier for MOCVD equipment in 2016 with a 55% market share. In our last conference call, I mentioned that AIXTRON technologies are enablers for mega tech trends, including the move to renewable energy and the electrification of transportation, both of which require higher amounts of semiconductor components and, in many cases, new materials to make those components possible. To add to that, 5G mobile connectivity, autonomous driving, and the Internet of Things, all of which require millions of sensors and other semiconductor products.
I said before, our deposition technologies will be strong enablers for these future semiconductor products, which will represent a solid demand for us. In order to benefit from these mega tech trends, we need to stay close to our customers to be ready with our technology when our customers need them. As usual in new and complex technologies, some of this timing is not fully clear yet. We are committed to supporting our customer once a firm timeline has been announced. In case of such technology roadmaps are not firming up, we have to be tough on ourselves on how to focus our internal resources. This is exactly the situation with TFOS. We are convinced this material will be required in the future, but we are not sure exactly when they will penetrate the market.
Against this background, we have made the decision to freeze our activities in this area with one-time cost this year and saving expected in 2018. As soon as we see progress in this market side, we can intensify our efforts, however, only if the market pays for it. This is the first example how we want to focus our R&D spending going forward. In the next steps, we are evaluating potential partnerships to strengthen the position of our product portfolio, as Kim described. These activities are one of our major focus areas this year, and we will give you more information on our progress in future conference calls. With that, I thank you for your attention, and we are now looking forward to answering your questions.
Thank you, Bernd, Charles, and Kim. Operator will now take the questions.
Ladies and gentlemen, if you would like to ask a question, please press 9 and the Star key on your telephone keypad. In case you wish to withdraw your question, please press 9 and the Star key again. Please press 9 and Star to state your questions. The first questioner is David Mulholland from UBS.
Hi, thanks for taking the questions. Firstly, obviously, good to see some action on the cost side of the business, I wonder if you could just give us some guidance on, now that you've paused the investment in TFOS, what should we expect in terms of R&D or even total OpEx for the full year? Secondly, bookings trends continue to be quite strong in Q1. How do you see the pipeline through the rest of the year? Can we carry on at these levels? I guess, how do you see the outlook for bookings in Q2, Q3?
Maybe I say something to the TFOS situation, Kim Schindelhauer. On the full year basis, we are planning with a saving of EUR 9 million-EUR 10 million. Maybe you can say something to the other part of the question.
Sure. Hi, this is Bernd. You know the ordering levels are quite solid right now, in short term, we're seeing this is potentially continuing. In our business, the possibilities to look far ahead than one quarter is quite difficult. In general, as Kim mentioned, we have confirmed our guidance, with that, mathematically, you can see that we are relatively positive going forward.
That's great. Maybe one quick follow-up on the OLED side. Obviously, I know you probably can't specify who the customer is it fair to assume that this is someone that's already active in OLED display? Could you possibly just give us a bit of background? Had you gone through the full process with this customer at your own site last year that led to this order? Maybe just a bit more color on the strength of the relationship with the Asian OLED display manufacturer.
Let me answer that. Sure. You can be sure that it is a customer who is already engaged in OLED manufacturing. I think we have been mentioned in previous calls that this program goes through three major stages. This is the second stage where we, with the customer together, want to prove the feasibility for high volume manufacturing, but on a smaller substrate size level. The first step was showing the feasibility of the technology in general. We are at the second step, of course, the third step would be doing this all together on high volume manufacturing size.
That's right. Thank you very much.
The next questioner is Jürgen Wagner from MainFirst Bank.
Yeah, good morning. Thank you for taking my question. Now post the R&D under the project freeze in TFOS, what would be a break-even sales level in 2018? The second question, what is your view on the gallium nitride LED market, particularly in China? There are some reports that the competitive pressure increased, or do you see an improvement even?
Bernd, will you say something to China?
Sure. Yes, indeed, there is certain movement in the competitive situation in China. You probably have heard that Chinese MOCVD suppliers are in the process of getting qualified with Chinese customers. What we're hearing from the market that they made step forwards and even receiving now orders on a significant order level. You can imagine that this changes the landscape quite significant in the market, in particular, when you consider that Chinese competitors have an even more aggressive pricing behavior than in the past. We are focusing our product portfolio in areas where we can play our unique selling points, and as such, we can achieve reasonable margins for our products. As such, we definitely looking in particular in the area of LED in China, but also elsewhere, in particular on specialty LED applications where high-yield performances are acknowledged.
Also, we're seeing a good opportunity and development in the area of red, orange, yellow LEDs in China.
In terms of the break-even, if you look at the quarter that we've just reported, we have an adjusted EBIT of EUR 6.1 million negative, and a gross margin of 25%. I think in the Q1 period, we've had some low-margin sales, as we previously said in the Q4 conference call about R6. We have to get the remainder of those out of the pipeline. The margin should improve slightly. I would think a break-even is somewhere around EUR 65 million every quarter.
Okay. That is the level also for next year then to look at?
Well, that might change if we consider any further actions on our IP spending. At the moment, that's static.
Status quo.
That is the current situation. Correct.
Okay. Understood. Thank you.
At the moment, there seem to be no further questions. For any questions, please press nine and the star key. Next up is from Baader Bank.
Hi, thank you. A third question on, you mentioned the AIX R6 sales. Has the inventory sell down, has this now been completed with the first quarter, or do you expect additional sales later this year?
We still have additional sales to clear during the remaining quarters of this year. Then I hope we should be done with the AIX R6 inventories. You could expect that the margins in the subsequent quarters may still be rather depressed by that.
You mentioned the situation also in China, and you are focusing increasingly on, for example, red, orange, and yellow LEDs. Given, let's say, less strategic importance for Thomas Swan and the showerhead technology going forward, is there any potential here to lower costs here from this perspective?
I think we rate the shower technology still as a very important part of our product portfolio. In general, the shower technology from terms of manufacturing cost of the product is not much different to our Planetary Reactor. In general terms, we are looking really into areas where we can use the strength of our products and where the market acknowledge those strengths and simply say, "Pay for it." That could include the Planetary Reactor, but the showerhead as well.
The last question on the memory CapEx environment. Last year, your sales were mainly related to CVD systems and for the NAND flash market. We have recently seen a recovery also in DRAM-related CapEx. Do you have any visibility, or do you expect a recovery of your DRAM-related ALD sales here this year?
We expect a slight improvement, but not a big improvement in terms of QXP-8300 sales. Still, the good news is we see still this very healthy momentum for the flash memory to continue, and we are seeing a very good request from our customer for the CVD tools to continue at least for the first half of the year.
Business for your QXP-8300 tool, would this be triggered by a new process node? Or what would be a trigger to get more sales related to the QXP-8300?
This would be triggered, number one, of course, being qualified with further film at various customers. Certainly also when our existing customers increases their investment into DRAM and sooner or later, this is going to happen.
Okay. Thank you.
Next up is Thomas Becker from Commerzbank.
Yes, good morning. Thank you for taking my questions. Just a quick one with respect to the positive EBIT you're targeting for 2018. Is this based on the current, let's call it restructuring measures, i.e. TFOS? Is this against the back of more to come? The next second question is with respect to cash. You had quite a healthy cash level, and you mentioned in Q1 and you mentioned inventories are at a 10-year low level. Let's say given the reversal in the next quarter, more normalization, I guess, what you think will be the cash level at the end of the year? What's your target there?
In terms of the cash, the guidance we've given is that our free cash flow will be better than 2016. Given that 2016 was minus EUR 40 something million, and we're plus EUR 34 million at the moment, I think we'll be considerably better than last year. I wouldn't like to give a guidance to the cash balance at the end of the year because that depends on the timing of sales, timing of collections.
The inventories that we still have for R6 should reduce over the next few quarters.
On the basis that other things stay the same, and that may or may not be the case, you would expect the inventory levels to stay roughly the same or perhaps even improve slightly. It depends on whether we get a large number of orders or whether we're making things in advance for customers, perhaps for OLED, who knows. The EBIT for 2018, we don't expect to be in the same structural position in 2018 that we are now. It's based on the assumption that in 2018 we have a different structure, we're not entirely sure what that is at the moment, because clearly we need partners and we need to agree those structures with the partners. We think on our best estimate that we will be breaking even or profitable next year. We can't say definitively what the structure is.
Okay. This means that what you have done to T-Force is not, let's say, the only thing which will happen then going forward. Your positive EBIT is also based on other measures to come to be announced.
I think this is what Kim Schindelhauer said, yes.
Okay. Last question from my side is, would you rule out that, given the order you received for your OLED program, that the OLED program per se is still under evaluation? Would you, let's say, rule out that the same thing, like which happened to T-Force, could happen to OLED as well? Or is this now in the safe zone after you again received the admittedly probably small order for OLED?
In general, we always consider and watch our technology, so we never rule anything out. It has been an important step, and if we can continue the pace and if we find the appropriate financial model to go forward, this is exactly what we're working here within the next month, and we will keep you updated as soon we can be more definitive in the actions we're going to play.
Good. Thank you.
The next questioner is Charles Lep etitpas from Natixis.
Yes. Hello, good morning. I had just one question. I understand that your 2018 guidance on EBIT level is based on finding new partners for your technology portfolio. I wonder whether you have already found one or several of these partners or not yet, and if you expect to find such partners during the next quarter. Thank you.
Yeah, this is Kim Schindelhauer. We definitely are looking for partners. We do not have any concrete partners yet, but there are a lot of interesting scenarios, and we will evaluate them as they come along. I think for 2018, then we will have more structure than today. I think as we all know from the P&L, the trouble is really the R&D spending. To give up future technologies, we don't want to do that as said before. We have some interesting ideas, and we will execute them as they come along.
Okay. Thank you.
Next up is David Mulholland from UBS.
Hi. Just a quick follow-up, apologies if I missed it, probably answered this earlier. On the receivable side, obviously a very low level in Q1 sitting on the balance sheet. You mentioned part of that was due to work internally on managing the cash flow of the business. Is this a sustainable level? Has something fundamentally changed on the kind of agreements you are doing with customers and payment terms? Is this a temporary level and things normalize in Q2?
I think with MOCVD, I think we do see the advance payments from customers with the order, that's different from most semiconductor equipment manufacturers. AIXTRON has, in the past, always had relatively low receivables days. I think it's around 50 at the end of March 2017, that has been the sort of normal level over the past decade.
Okay. To summarize, you would say it's still quite sustainable at this level?
The receivables says yes.
Okay. Thanks very much.
There are no further questions.
Thank you very much to all our listeners and questioners, question askers. Yeah, thank you very much. Have a good day, and we'll be still available for further questions if you have any. Thank you.
The conference is no longer being recorded.