Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the conference call on third quarter 2022 results. Throughout today's recorded presentation, all participants will be in a listen-only mode. Presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Alexander Everke, CEO, Ingo Bank, CFO, and Moritz Gmeiner, Head of Investor Relations. Please go ahead, gentlemen.
Good morning, ladies and gentlemen, and a warm welcome from my side. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's conference call on our third quarter results. As usual, Alex will guide you through the main developments in our business, while Ingo will then focus on key developments on the financial side. With that, I would like to turn it over to Alex, please.
Yeah. Thank you, Moritz. Good morning, ladies and gentlemen. I'm happy to welcome you to our third quarter 2022 conference call this morning. In this webcast, I will comment on our business before Ingo will guide you through the financials. Starting off with the key results. Our third quarter revenues came out solid and fully in line with our guidance at EUR 1.21 billion. The adjusted EBIT margin for the third quarter was 7.5%. Let me first update you on the latest in our disposal program and integration of Osram. We have reached the midpoint of our planned synergy creation period, and I'm glad to confirm that we have created EUR 245 million or 70% of the total expected synergies and savings, which is fully in line with our plans.
We are equally successful in our integration programs, which are progressing to plan, and they continue to have highest attention as we drive the integration. We are now in the final chapter of the planned disposals and look forward to closing the last two already signed transactions, one of which is expected to close before year-end, as well as completing the last smaller scale disposal, which is also progressing. We expect proceeds from these disposals totaling more than EUR 550 million, which is even slightly above our estimates at the beginning. We are on track to realize our targets related to the integration of Osram. Let's now take a look at the development of our business. We delivered a solid performance with a sequential revenue growth in a more demanding market environment.
We are seeing the previously mentioned inventory adjustments in end-market supply chains, particularly in the automotive sector. We are also seeing continuing effects from lower automotive production volumes and smartphone shipments year-on-year. These developments are embedded in an environment of increasingly unfavorable macroeconomic momentum. These market trends also drove the previously announced decreased production volumes, which impacted group gross margin in the quarter in line with expectations. As announced in summer, we have defined additional cost mitigation measures, which complement the existing synergy programs to manage through the more uncertain and evolving microeconomic environment. They include reduction in global operating expenses, including streamlining and efficiency improvements for certain R&D programs, as well as various efficiency improvements in production activities. This is a meaningful initiative as these measures have a total cost mitigation volume of around EUR 100 million.
Implementation of those initiatives is ongoing, and we expected them to be completed in the first half of next year. Before I look at our segments, I can report that the strategic development and industrialization program for our leading smallest structure size microLED technology is advancing as planned, supported by excellent customer engagement. At the same time, the construction of industry-leading 8-inch LED front-end fab is also progressing in line with plans. Beyond these prioritized programs, design activities and success across our customer base continue to support our pipeline for the mid to longer term. Irrespective of the current industry situation, customers are highly interested in harnessing the advantages of our portfolio for their roadmaps and future solutions. In this context, I'm very glad to confirm a substantial prepayment agreement for future deliveries, which underpins an existing agreement.
This agreement is meaningful in size and a clear testament to our highly attractive offering in innovative technologies. Moving now to the segment's performance. The semiconductor segment was the key element in our business, providing 67% of revenues. The semiconductor automotive business showed a solid performance in the quarter, which was in line with expectations. Here we saw reduced production volumes in several product areas to accommodate the market and supply chain situation. Demand trends reflected inventory adjustments, reduced OEM volumes, as well as increasing macroeconomic uncertainty. At the same time, we continue to be successful in driving market adoption of next generation lighting innovations for future car platforms, together with good design traction in diverse sensing application. The semiconductor consumer business recorded solid results that tracked our expectations.
This is against a backdrop of lower overall smartphone shipments year-on-year, though newly launched platforms were able to provide supports to market volumes in the quarter. The less favorable environment for mobile devices continues to include a weaker Android market year-on-year, while demand is increasingly reflecting the more negative macroeconomic trends as well. Aside from these trends, our portfolio is successfully serving a wide range of devices in the major consumer segments. Here are two examples in wearables. Body temperature monitoring in latest wearables underscores our broad market coverage in optical sensing. We are seeing a good design traction in wearables with different solutions for vital signs and health data monitoring. The semiconductor, industrial and medical business again provided an attractive, solid contribution to segment results in the quarter. Shipments of differentiated LED products remained at good levels for important markets.
This was also true for our industrial and medical imaging solutions. Next generation CT imaging continues to have good market traction for the longer term, while industrial imaging benefits from its very well-established market position. Exiting the quarter, we began to see demand trends in certain industrial markets, such as horticulture, turning softer, which certainly reflects the unfavorable macroeconomic momentum. Moving to the Lamps & Systems or L&S segment. The segment delivered results that were in line with expectations, providing 33% of revenues for the quarter. Inside L&S, the automotive business, including legacy traditional lighting, recorded a solid performance which was well in line with expectations and reflected inventory adjustments and imbalances in the automotive sector. Our global automotive aftermarket activities provided an attractive contribution to L&S results.
The other L&S business for traditional industrial, building-related and medical applications also performed well in line with expectations as overall end- market demand remained supportive in the quarter. Let me now come to the outlook for our business. Our expectations for the fourth quarter reflect a market situation where slowing macroeconomic momentum, less favorable demand trends and inventory adjustments result in a demanding environment. We therefore expect an approximately flat sequential revenue development at the midpoint, with fourth quarter expected revenues of EUR 1.15 billion-EUR 1.25 billion based on current information and exchange rates. In the automotive market, inventory adjustments are continuing in the current quarter, while uncertainties about overall volume trends into next year remain at high levels. The industrial market has now started to see slowing momentum in lighting and horticulture applications, driven by effects from ongoing inflation and energy price developments.
In the consumer market, we see weakness in the Android market continuing through the remainder of the year. The expected revenue development in the fourth quarter nevertheless remains supported by our broad application and customer exposure across end-markets. Given current demand trends, we expect decreased production volumes to continue in the fourth quarter, creating a negative impact on group margins. We therefore expect an adjusted operating margin of 6%-9% for the fourth quarter, based on currently available information and exchange rates. Our outlook also includes deconsolidation effects from disposals when compared to the same period last year. Looking further out, we have seen significant changes in the macroeconomic and industry environment over the course of this year. These include heightened uncertainty regarding the economic outlook, as well as widespread and meaningful inflationary pressures driven by geopolitical developments.
We are taking a cautious view given this demanding outlook for our markets and ongoing and expected cost inflation for our business and our customers, which is likely to impact midterm volumes and technology adoption in certain markets. These include areas such as horticulture, outdoor lighting, or certain Android and non-smartphone consumer applications, resulting in less favorable product mix assumptions. We therefore update our midterm financial targets and expect revenues of EUR 4.7 billion ± EUR 300 million, and an adjusted EBIT margin of 13% ±100 basis points for full year 2024. The expected timeline for the industrialization and volume production availability of our leading microLED technology is not changed by these updated assumption. Moreover, the long-term financial target model for the group, which is fully supported by our long-term strategy for leadership in optical solutions, remains unchanged.
With this, I would now like to hand over to Ingo.
Yeah. Thank you, Alex, and good morning to all of you. Before I start going through the key financials, a few things up front. When we refer to adjusted financial metrics, we refer to adjustments for M&A related transformation and share-based compensation costs, as well as results from investments in associates and the sale of a business. You will, as you know, find the reconciliation to the IFRS basis of presentation available on our investor relations website. Now let's take a closer look at some of the key financial metrics for the third quarter of 2022. I'm now on page 15 of the presentation.
As pointed out by Alex already, with revenues of EUR 1.21 billion and an adjusted EBIT of 7.5%, we came in well within our guidance for the revenue line, actually slightly above the midpoint. Adjusted gross margin was at 28.7% in the quarter in line with what we had expected, and the adjusted net result was EUR 47 million. Operational cash flow was strong in the quarter with EUR 151 million or around 12.4% of revenue. Net debt reduced to EUR 1.59 billion, which is EUR 132 million lower than the previous quarter, and the overall leverage was stable at 1.75x as per the end of September 2022. Now moving to revenues on slide 16.
Revenues for the third quarter 2022 were about 3% higher sequentially, despite an ongoing demanding market environment and portfolio effects. When you exclude the portfolio divestment related effects, like-for-like growth was around 6%. When you compare to the same quarter in 2021 on a comparable portfolio basis, so in other words, you adjust for the portfolio changes of EUR 92 million, revenues are higher with 1.4%. When we turn to our revenue distribution on page 17, you can see that automotive contributed 39% of revenues in the quarter, industry and medical 37%, and consumer at 24%. The revenue contributions from our two reporting segments were largely unchanged, with semiconductors at 67% and L&S systems at 33%. Looking at group profitability on page 18, our gross margin was at 28.7% lower sequentially.
This is reflecting lower production volumes as guided for back in July as a result of ongoing inventory adjustments in our industries, reflecting increased uncertainties in the current macroeconomic environment. At 7.5% of revenues, adjusted EBIT came in at the midpoint of our guidance. Compared to the same quarter in 2021, adjusted EBIT was 2.8 percentage points lower, reflecting lower volumes and a less favorable mix, clearly reflecting the backdrop of a significantly changed macroeconomic environment when compared to just 12 months ago. Moving now to the update on our synergy and cost savings update on page 19. We're making good progress with the creation of synergies and are fully on track, also towards the targeted end goal of EUR 350 million in pre-tax gross synergies and savings.
As to the end of September 2022, the synergy run rate increased to EUR 245 million gross and pre-tax when compared to our baseline of 2019. It represents 70% of the targeted overall level, having started this process approximately 1.5 years ago. The remaining synergy and savings creation focus until 2024 will be largely focusing on finishing our SG&A cost saving roadmap, particularly on ERP and IT infrastructure and the simplification of the combined company legal and billing entity setup. Beyond SG&A, importantly, the focus will also be on cost of goods sold, particularly the industrial footprint consolidation plus related direct and indirect labor productivity improvements. We have started to implement the announced footprint consolidation measures in Asia as planned for the latter half of the integration and synergy creation period.
Associated with these steps, we expect to record a restructuring charge of up to EUR 60 million in the fourth quarter 2022 IFRS results. These expenses are part and were already included in the overall total one-time cost estimate of EUR 270 million communicated back in 2021 to realize the synergies and savings from the acquisition. When we now move to page 20, you also see my comments on our synergy and cost savings reflected in the reduced OpEx spending level for the group. Compared to the same quarter a year ago, our adjusted absolute OpEx spend was 12% lower. You see this also trending, particularly in the SG&A expenses, where we were at 10% of revenues in the quarter, 150 basis points lower when compared to the same quarter a year ago and progressing towards our target corridor.
R&D spending continues to be at the 12% mark. Turning now to our adjusted net result and EPS on page 21. The adjusted net result for the group in the third quarter 2022 was EUR 47 million, including a net financing result of EUR 58 million, very similar to the same period a year ago. Reported net result was negative with EUR 370 million in the quarter. In view of financial market developments, particularly with respect to increased interest rates and the related increased applicable cost of capital, as well as macroeconomic developments. The company recently conducted an impairment testing of assets for the reporting quarter in line with IFRS requirements. As a result, we recorded a non-cash impairment charge of EUR 335 million, including the restructuring of certain production capacities for the quarter.
Adjusted basic earnings per share in the third quarter 2022 were CHF 0.18, respectively EUR 0.18 for the quarter. Let's now move into the segment results, starting with the semiconductor business of the group on page 22. Sequentially, revenues for the semiconductor segment went slightly up with 1.8% in nominal terms, resulting into revenues of EUR 813 million in the quarter as expected. Compared to the same quarter a year ago, revenue declined by approximately 6%, largely driven by lower volumes, reflecting a completely different macro, macroeconomic and geopolitical environment when compared to just 12 months ago. Adjusted EBIT was 7.5% of revenues, down from prior year quarter as well as sequentially. This reflects lower production and sales volumes in a demanding market environment where inventory and market adjustments are still ongoing.
In addition, revenue mix was less favorable. During the quarter, we saw ongoing inventory and end-market adjustments, which we expect also to continue in the fourth quarter of 2022. Solid results in automotive, good performance in industrial end-markets, and less favorable market trends in the consumer markets, given lower smartphone volumes year-over-year. Only limited recovery of our business activities in China. Moving to Lamps & Systems. Revenues for the Lamps & Systems segment were EUR 400 million, up 4% sequentially, despite quarter-over-quarter deconsolidation effects of approximately EUR 40 million from disposed businesses. This result was driven by solid performance of our Lamps & Systems-related traditional automotive business. At the same time, we also saw good demand in the industrial businesses of Lamps & Systems. Compared to the same quarter a year ago, portfolio effects accounted for EUR 92 million.
Adjusted EBIT for the quarter improved to EUR 30 million, representing an adjusted EBIT margin of 7.6%, up 210 basis points compared to the same quarter in 2021, also reflecting positive effects from the portfolio divestments. At the beginning of the quarter, we also successfully closed the sale of the mentioned AMLS business to Plastic Omnium, as we communicated already alongside the Q2 2022 results. Moving on to our cash flow and the debt position of the group on pages 24 and 25. The group's operating cash flow was very solid in the third quarter of 2022 at EUR 151 million, translating into around 12% of revenues. CapEx in the quarter was EUR 95 million, similar to the second quarter of 2022. Year to date, we are now at EUR 304 million.
In light of the current market situation, we have revisited our CapEx plans and priorities outside of the investment into our new 8-inch LED front-end fab, and now expect a lower level of full year 2022 CapEx of EUR 600 million. Free cash flow in the quarter was positive with EUR 56 million, and for the first nine months of 2022, free cash flow is positive with EUR 93 million. Moving now to page 25. The group's cash and cash equivalents stood at EUR 1.24 billion at the end of Q3 2022. In the quarter, we reduced our gross debt by more than EUR 300 million, given the redemption of a convertible bond that matured in September 2022, as well as of a promissory note.
This is in line with what we communicated earlier already this year as part of our commitment to reducing gross debt. Net debt stood at EUR 1.59 billion. This is a reduction by EUR 132 million when compared to our June quarter. Overall, this translated into a solid financial leverage of the group of approximately 1.75 x unchanged. Let me now move to the outlook on page 26. Alex provided you already some comments how we see the different end-markets developing, particularly when moving from the third into the fourth quarter of 2022. Following that assessment, we do expect inventory and market demand adjustments to continue in the fourth quarter of 2022, impacting production volumes in our manufacturing operations.
For the fourth quarter, we expect group revenues of between EUR 1.15 billion-EUR 1.25 billion, so remaining flat sequentially despite the challenging macroeconomic environment. The company's adjusted EBIT margin is expected to be 6%-9%. Let me also provide some color on the midterm. We do expect an environment of persistent cost inflation to continue over the midterm, which has important effects. Cost impacts to ourselves, namely wage inflation, but also energy and certain other materials. Cost impacts impacting our customers and their own customers, which will mean lower or delayed adoption of certain technologies or sales volumes in certain end-markets. It means that the base from which market volumes will progress over time are expected to be lower compared to previous expectations.
As part of our Q2 2022 earnings release, we indicated that we are proactively implementing cost mitigation measures against the backdrop of a challenging macroeconomic environment. To that end, we have defined cost mitigation benefits of around EUR 100 million in addition to the synergy and saving programs already in place and running. These measures will be addressing cost of goods sold and OpEx cost lines across the group. Concluding, and for reference purposes, when comparing to the fourth quarter of 2021, the portfolio effect on the revenue line amounts to approximately EUR 70 million. This means that this amount of revenue was in our fourth quarter 2021 financials, but is no longer in our expected fourth quarter 2022 financials, given the deconsolidation of these activities in the meantime.
With that, I would like to give it back to the operator to open the floor for questions. Thank you.
Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. First question is from Janardan Menon from Jefferies. Please go ahead.
Hi, good morning, and thanks for taking my questions. I have a couple if I may. The first one is on the prepayment. Can you give us any indication on whether this prepayment was made by your microLED customer or was it from any other category of products category within your portfolio? And can you also give us the reason why the prepayment was made? Is that for any kind of capital investment to set that off? Or was it just given the current macroeconomic conditions that you wanted a prepayment and the customer was willing to give that? Then I have a couple of follow-ups, please.
You can imagine that due to confidentiality agreements, we're unfortunately not able to add any further details at this point. The only thing we did is to confirm that we have a prepayment agreement.
Okay. Have you got such prepayments previously on contracts or is it a relatively rare situation in your business?
Look, I can't really comment on this, but certainly not of this nature in the past.
Okay. Got it. In your previous call you had mentioned a new sensor design win on the smartphone side. You didn't really refer to it today. Is that still something that is going to add to your revenues in 2024 or has anything changed on that program?
No. It's Alex here. No, nothing has changed. All as is before.
Understood. One last one from me. You're talking about auto inventory and reduced automotive production. You know, in general, the news flow in the automotive sector seems to be quite strong right now. You know, car maker volumes seem to be quite healthy. In general production levels, the news flow seems to be quite positive there as well. I'm just trying to understand the difference in your commentary versus what you're hearing from, you know, the industry and some of the other suppliers. Can you help us sort of match up that difference at all?
Yeah, I think, you know, already when we moved from the second into the third quarter, we were pointing to what we saw from our customer base. Given our strong position in the automotive industry, we felt that it was important to point that out. We saw that also then happening in the third quarter, and we see it continuing also into the fourth quarter. I think it's fair to say that there's still quite some uncertainty out there and that the whole automotive supply chain overall is continuing to be complex and rather demanding.
You have on the one hand, you had this situation of a fairly difficult supply chain on the one hand, and on the other hand you then had all of a sudden macroeconomic headwinds coming in, particularly if you look at inflation, for instance. Therefore, we can only point to what we see. Our view is we have a fairly good view as to, because given our market position, and that's all we're doing. Also from my own experience in the past, you will find at this point in time that there are, you know, different situations also per a region sometimes and also per OEMs.
Overall, what we're seeing is still very much challenging and demanding environment where we think inventory corrections will continue also into the fourth quarter.
Understood. Thank you very much.
Next question is from the line of François-Xavier Bouvignies from UBS. Please go ahead.
Good morning. Thank you very much. Can you hear me okay?
Yep.
Yes, we can.
Yes, we can.
Perfect. I have two quick questions. The first one is on the CapEx that you reduced in 2022, and I was thinking what we should expect for 2023. Do you see a lower CapEx as well as you adjust, you know, the macro environment and, you know, maybe less capacity? How should we think about the free cash flow into next year, also including the prepayment? That's my first question on the free cash flow, and the second one is on the margins. We see that Q4 guide is like a flat quarter-on-quarter margins.
It seems that you are reaching kind of a floor, and if we take into account your cost saving programs and, you know, potentially some improvement on the automotive side, should we expect, you know, the Q4 to be like a floor, from this level looking forward? That would be helpful. Thank you very much.
Okay. On CapEx, indeed, we have started to, of course, look at our CapEx spend, not just for 2022, but also for 2023. For 2022 we already sort of indicated that we are looking at a significantly lower level than what we originally thought. Then for 2023, we're also targeting to get lower than what we originally assumed. We're targeting a spend lower than the EUR 1 billion that we had communicated or even more than the EUR 1 billion that we communicated earlier in the year. We're still working on that, but clearly we are sort of reflecting the current environment also from that perspective.
On the fourth quarter and the floor question on the margin, I think we are still in a very uncertain environment. We therefore have taken all these measures also from a cost perspective. I think that's important to assume. We don't see necessarily that the macroeconomic environment will fundamentally change it over the next, let's say, three or six months or so.
Also, if you listen to a lot of economists right now, so that's why we are now focusing clearly on what is in our control because geopolitical and macroeconomic environments, developments are not in our control, but we're focusing on what we definitely have in control, which is cash and costs, which you typically do in these type of environments. That also means obviously that we are sort of addressing our own working capital, for instance, inventories to help the whole industry to sort of settle back into what our healthy inventory lines, et cetera. That of course is in the short term impacting margins.
Once that correction is there, then that indeed should be the floor and then we should see things moving up, once that correction overall in the industry is there. We're still in that process right now.
Thank you. Thank you.
Next question is from the line of Jürgen Wagner from Stifel. Please go ahead.
Yeah, good morning. Thank you for taking my question. Actually, I have two. Follow up on the auto inventory correction at your customers. When would you expect this to end compared to how long it took in the last inventory corrections? On Osram's LED business, how do you see your competitive environment currently changing, as many Chinese players seem to be blocked from Western design wins going forward? Thank you.
On automotive, it's indeed this was the first kind of end-market or industry we're in, where we saw inventories adjust alongside the chain. As I just said, that we believe that will continue also into the fourth quarter. It's a bit of a matter of how we see us moving into next year. If you look at IHS still expects overall an improvement in production volumes for next year compared to this year. I think that's still a little bit in flux. Relatively speaking, I'd say, Mr.
Wagner, that the corrections in the automotive industry are more progressed and further than they are in some other industries, and probably closer to what they should be than in some of the other industries we're working in right now. Alex, you wanna comment on the LED?
Yeah. Let me take the second question. I think for the competitor landscape, first of all, we are looking always very carefully what our competitors are doing. I can clearly tell you, and there are two angles to it, that we feel confident with our positioning within the competitive environment regarding our LED technology. As you know, our strategy is to focus predominantly on very differentiating technologies, which certainly will create better design win activities for our customers and better margin profiles as for us as a company. Examples we have mentioned in the past, microLED is certainly one of the prominent examples where we are clearly leading, and that's the reason why we're also the first and only one building an eight-inch very differentiated manufacturing capability in Malaysia.
Other products like horticulture, UVC and other LEDs, pixelated lighting for automotive. We have a lot of examples which demonstrate that the differentiated technology is clearly accepted and wanted by our customer base. Second aspect to LED and competitiveness is that we certainly are in a very unique position, the combination of ams and Osram, whereby when we combine LED technology with sensing functionality, that we have a very strong competitive advantage, if you compare us with other companies in the industry. All in all, we are well-positioned, and we are building the future of the company on the strengths we have.
Now maybe let me add a word on. I think you were also referring probably to the sanctions regime.
Yep.
By the U.S. It's true that the important supplier base, which is handling the EPI-reactors, is no longer allowed basically to deliver modern technology into China. That obviously is, let's say, relatively speaking, different to what we had in the past. I mean, we have been always on the leading front anyway, on the EPI side, and we will continue to do so. A lot of the LED makers in China are also in areas that we're not really operating in, particularly a lot of the sort of low power, mid power type of chips. Yeah, it will make it more difficult for them, but we should nonetheless. You know, we should not focus on that.
For us, the focus is more to continue to be on the leading edge, which we've always been, and we're working with those EPI companies that you know very, very closely, and we will continue to do so. That's how I would look at that sanctions impact.
Okay. Good. Thank you.
Next question is from the line of Didier Scemama from Bank of America. Please go ahead.
Yeah, good morning. Thanks for taking my questions. Two, if I may. First, maybe can you talk about the design win you have in microLED, which has now been supported by a prepayment? What's the timing of that in terms of ramp? And related to that, I just wondered why you actually booked the prepayment in your balance sheet, because it was not quite clear where the delta was. And related to that, is the prepayment, you know, a sort of guarantee of design win and shipments, but also reflection of concerns that your customer may have around your balance sheet, or is that part of the conversation, the relationship?
Yeah. Alex here, let me take the first part of the question. On microLED design win activities, we are for, as mentioned before, very confident in the funnel we're seeing in the next years to come. The manufacturing sites are just building up in Malaysia, we'll be able to ramp production in 2024. We see more and more traction and interest in multiple areas of applications which goes from not only consumer space, but also automotive space, TV opportunities. We see a broader range of interest for this technology in multiple market segments.
Yeah. Maybe then on the prepayment agreement. Your question I think was on the prepayment agreement. Like Alex said in his prepared remark, the prepayment agreement is an agreement, and it's a testament to the highly attractive offering we have in innovative technologies. That's it. There is no concerns of our customers what you suggest on the balance sheet or anything like that. That is absolutely not the case.
Okay. Just a quick follow-up. On the calendar year 2024, cut to the revenue guidance. You mentioned that it's not due to the microLED opportunity. Understood. The EUR 200 million delta, can you just maybe give us a bit more detail as to what you actually took down in your assumptions?
Yeah, I think we tried to already in our prepared remarks, basically, to explain that we do not see certain end-markets developing at the trajectories that we had previously assumed, when the macro environment and the cost inflation outlook were really significantly different. I think we were pointing to, for instance, the horticulture market, where the adoption is expected to see some delays simply to higher energy costs, and also auto lighting, where the global construction industry and public spending is going to certainly be impacted by or is already impacted by higher interest rates.
I think Alexander also mentioned already, somewhat of a slower adoption for certain Android applications, where we see some trajectory less with a bit more setbacks, simply creating a lower base, from which you exit. There are certain non-mobile consumer applications, and you can think of, AR, VR, or certain digital health applications. Where we simply have now a view more cautious on a trajectory, that is clearly impacted, by the developments, around us in the last six-seven months.
Okay. Thank you very much.
As a reminder, if you'd like to ask a question, please press star followed by one on your touch tone telephone. The next question is from the line of Sébastien Sztabowicz from Kepler Cheuvreux. Please go ahead.
Yeah. Hi, everyone. Thanks for taking my question. You target 13% margin by 2024, and looking at your Q4 guide, you should end 2022 with 8.5% margin, more or less. How do you see margins trending into 2023? How should we model the margin in 2023 to move to your 13% margin target 2024? That would be the first question. Second one, coming back to the previous question, you mentioned lower volume expectation for some specific Android application. What kind of Android application are you talking about when you cut your target for 2024? Is it about 3D or other specific application within the Android ecosystem? Thank you.
Yeah. Let me start maybe with your question on 2023 and the 13%, and then maybe Alex can comment more on Android. As you know, we're not providing guidance now for 2023, but I think it's fair to say that the challenging macro environment, including some uncertainty about the global economy and cost inflation, demand trends for consumer and automotive will continue to play a role also for 2023 as it looks today. I think anyone in our industry now will find it difficult to offer you a clear view on 2023 developments and potential outcomes.
I think what's important though is that we are taking the appropriate cost measures to make sure that we focus on those things that we can control in such an environment where a lot of the variables that affect our end-markets are outside of our control. Therefore, we have also specified the additional EUR 100 million in cost mitigations in the various areas that we're addressing as a result. We're continuing to also, of course, drive the synergy and cost savings where we've progressed very well so far. That's all I can say about 2023 right now. Maybe Alex on Android.
Yeah. On the Android market, I mean, first of all, we see, as we mentioned multiple times, that the Android market is relatively weak for multiple reasons. For that reason, clients usually are more careful in adding cost and adding new features. We see this trend clearly in world-facing sensing applications, includes 3D, where we see a more cautious approach from customers to adding cost to their phones when it's anyway very difficult from the demand point of view to sell more phones. But it also addresses some other applications, which brings enhancement to feature sets of Android phones, where we see a more slower adoption rate for the next quarters to come. Because of that reason, we are cautious in our approach.
Okay. Thank you. Thank you.
Next question is from the line of Robert Sanders from Deutsche Bank. Please go ahead.
Yeah, good morning. I was just wondering if you could dive a little bit deeper on underutilization and footprint inefficiency. I'm just looking at the 29% gross margin you just reported in Q3. I was just sort of wondering, if you were to be fully- loaded, what that kind of gross margin would be. I mean, I'm guessing it's a 500 basis points headroom, but potentially even more. I'm just trying to understand what kind of margin uplift you could get from either better loading or, you know, closing some of these sites that are clearly dragging at the moment. Thanks, and I have a follow-up.
Yeah. Thanks for the question. Indeed, if you are moving into environments where volumes are adjusted also in the chain and if you look at our industrial setup, you clearly see the impact, and you also see it then obviously the other way around as well when things are reversing back to, let's say, normal or improved levels. I think if you look back to what we said back also at the Capital Markets Day about our margin progression, indeed, asset utilization was a big factor.
With the footprint consolidation that we basically confirmed in the call also today and in the print, that is a very important step in sort of structurally removing some of that, but also obviously when the volume comes back and the revenue line improves, and that's clearly what we expect when you look at also the 2024 guidance that we've updated, then asset utilization is a meaningful impact on improving our gross margins. If you look at what we said during the Capital Markets Day, that is a very important factor. You're absolutely right.
I have a question just on 2024, a bit related to Janardan's question. You have this consumer sensing win, it sounds like a pretty big one, at a Tier 1, and then you have this microLED ramp in 2024 as well. I was just wondering if you could just outline which would be the larger contribution on a run rate basis to 2024 revenue. Thanks.
Well, I would say, it's always difficult to compare projects with each other. As you know, it's not easy to give more details on those. Usually how you can imagine is that in the consumer worlds, wins in the sensing part usually is dedicated to certain platforms for a certain period of time. I would say if you look at the competitive landscape in the area of microLED, I think we clearly pointed out our positioning there compared to our competitors. You can expect more longer term and more sticky business over the years.
Got it. Thanks.
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