Ladies and gentlemen, welcome to the ams half year 2019 results conference call. I'm Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for question at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. [Non-English content]. At this time, it's my pleasure to hand over to Mr. Alex Everke, CEO, Mr. Michael Wachsler-Markowitsch, CFO, and Mr. Moritz Gmeiner, Head of Investor Relations. Please go ahead, gentlemen.
Good morning, ladies and gentlemen. This is Moritz Gmeiner. I'm very happy to welcome you to this morning's conference call on our second quarter and half year 2019 results. As usual, Alex will run you through the developments in our business, while Michael will then take a closer look at our financials. Alex, to you.
Thank you, Moritz. Good morning, ladies and gentlemen. I am very happy to welcome you to our second quarter and first half 2019 conference call this morning. I will discuss our business starting with some key financial figures. Michael will later take us through the financials in detail. Our second quarter revenues came in at $415 million in the upper half of our guidance range, showing a sequential increase of 8%. Our adjusted EBIT for the second quarter was $50 million or 12% of revenues, nicely above our expectations. As you can see, our business showed a robust performance in the second quarter and for the full first half of 2019. The positive second quarter was again predominantly driven by our consumer business, which provided the largest contribution to results and where the demand environment turned more supportive in the second quarter.
We hold a leading position in optical sensing with an extensive portfolio that includes 3D sensing, VCSEL technology, high-quality display management, and Behind OLED technology as important examples. As a leader in 3D sensing technologies, we are an important supplier of high-volume 3D sensing solutions. We cover all three technologies, structured light, time-of-flight, and active stereo vision for front-facing and world-facing systems with a current focus on 3D illumination. The anticipated positive momentum in 3D sensing shows as we move through the current year and look at market developments going forward. We are shipping 3D sensing solutions to the world's top smartphone OEMs in volume, while we added an expanding volume base in Android market in the first half.
As we move along a multi-year adoption timeline for front-facing 3D sensing and are in a very early stage of a comparable multi-year timeline for world-facing, we are able to serve different customer needs across all three technologies. Based on our extensive portfolio, we continue to strengthen our market position in 3D illumination and see further devices launches in the second half of this year. Our advanced VCSEL technology offers advantages in 3D sensing illumination for all 3D technologies. This makes our high-power VCSEL portfolio a key driver of our ongoing success in 3D sensing. We are able to provide full 3D illumination solutions to OEMs, which incorporates VCSELs, VCSEL driver, optics, module design, and/or manufacturing. Giving their high differentiation and optimized performance, the solutions create a competitive advantage compared to VCSEL-focused vendors.
Following platform launches in the first half, we have already shipped high volumes of illumination products for first world-facing iToF 3D sensing systems at two leading Android OEMs. At the same time, and importantly, our business with major Asian OEMs is not facing any noticeable constraint to the current trade-related uncertainties, and we also see clear positive momentum for our business there. We are supplying increasing volume to these systems as we enter the second half, supporting camera-enhancing features, and I can say our market share in this area is expanding meaningfully. For these applications, we also see a positive dynamic in the coming year. We are also pursuing a roadmap for dToF technology in addition to these iToF-based solutions, showing our strong technology position and development focus on time-of-flight technologies. Our 3D sensing solutions continue to ship in substantial volumes through the second quarter.
One area of development focus in our R&D are under-display and related optical technologies with a roadmap for 3D. Besides looking at under-display technologies, this includes developments for so-called around-display solutions for barely visible 3D systems. We recently announced another partnership in 3D sensing with leading China software experts, MEGVII. Together, we want to accelerate market availability for active stereo vision designs for consumer-oriented 3D authentication outside smartphones. The reference designs will target applications such as access control, locks, and point-of-sale payment systems. This partnership confirms the growing market interest in expanding 3D authentication to additional areas. Additionally, we see very strong market traction for our long-distance 1D ToF solutions for precise distance management, up to around 2.5 m.
Here we have one first design for Laser Detection AutoFocus or LDAF for backside cameras at an Asian smartphone OEM and see further opportunities in smartphones as well as in IoT. We have also entered into an important partnership with China-based leading image sensor vendor, SmartSens, in the field of 3D illumination and near-infrared or NIR image sensing. This partnership targets 2D and 3D solutions and applications requiring high quantum efficiency in the near-infrared range. Together, we will first advance an active stereo vision reference design for consumer 3D applications. This is based on the latest near-infrared image sensor with state-of-the-art quantum efficiency of up to 40%, and our illumination systems capabilities. The design enables high-performance depth maps for payment, face recognition, and AR/VR for competitive system cost.
We are excited about this partnership for faster time to market, which leverages our 3D illumination offering and core IP in global shutter technology. Importantly, this partnership extends into sizable and very attractive automotive markets. Here it will help enable and accelerate innovative applications for 2D and 3D optical sensing inside the cabin, such as driver monitoring and identification. Extending even further, the cooperation will also advance industrial opportunities that are starting to emerge. Here we are already engaging with a large OEM for an active stereo vision application in a household robot. Both of these new partnerships underscore the attractiveness of active stereo vision for a broad spectrum of cost-efficient 3D solutions, which have wide appeal in diverse markets. They also show our leadership in 3D sensing, which makes us a preferred partner in 3D sensing development.
Leveraging all of our 3D technology partnerships, we are strengthening our leading position in 3D sensing, which is built around hardware and software IP in our portfolio and system know-how. We see positive momentum for these markets as application areas for 3D technology continue to broaden, opening up new opportunities for the future. As you can see, given the breadth of our 3D portfolio, we are agnostic to the 3D technology customers prefer and have strong engagements across top customers. In display management, we are recording high shipment volumes of our new solutions for high performance Behind OLED display, proximity, and light sensing. They demonstrate the excellent success of this innovation shortly after market introduction. Our Behind OLED sensing enables OEMs to place light and proximity sensing invisibly behind the OLED display in order to pursue maximized screen-to-body ratio and bezel-less phone designs.
We are already supplying several major Asian OEMs for a range of recently launched high-volume smartphone platforms, which are successful in the market. Supporting the trends to remove bezel-placed elements from the front side of smartphones, this unmatched technology is showing very good traction at consumer OEMs. There we expect behind OLED sensing adoption to expand meaningfully into the next year. Significant shipments to customized true color sensing solutions for advanced display management continued in the quarter. We are also shipping high volumes of new flicker detection light sensors, which improve picture quality by detecting artificial light flicker to several Asian smartphone OEMs. Our development focus on new optical sensing technologies and application is unchanged, including biosensing and as mentioned, under display optical technologies with a roadmap for 3D. In biosensing, our solution offers high-quality blood pressure measurement, providing valuable personal health data, plus additional health-related information.
We are actively engaging with OEMs to pursue medical grade certification for blood pressure measurement in the United States, which is expected by year-end, to be followed by China. Our audio sensing business performed well in the first half, while other consumer product lines saw attractive volume gains. Leading in audio and active noise cancellation, we have launched an innovative solution for high-quality noise cancellation in loose-fitting wireless earbuds and are seeing strong interest from consumer OEMs. Additionally, our exclusive augmented hearing technology allows relevant audio information, such as speech, to selectively bypass noise cancellation. Let me now move to the automotive, industrial, medical portion of our business. Our automotive, industrial, and medical business showed an overall good performance in the second quarter and first half that tracked expectation.
In automotive, we recorded a second quarter in line with expectations, successfully navigating through a more challenging market environment with continual mix and demand across regions. Based on the diversified solution and customer portfolio, our main focus is in safety, driver assistance, autonomous driving, position sensing, and chassis control. While automotive sensing content continues to expand, our focus areas are not propulsion technology specific, allowing us to benefit irrespective of propulsion technology market shares. In the quarter, we announced details around the reported large program for VCSEL illumination and solid state 3D LiDAR. Here we work with tier one system supplier, ZF, and technology partner, Ibeo. Strong development activities continue for this program, where we are able to combine the advantages of non-scanning and scanning approaches into a best of both solid-state scanning architecture. This highly innovative solution is based on an addressable VCSEL array.
Through an unmatched combination of our VCSEL technology and VCSEL driver design, which also ensures eye safety, we create a high power, high count VCSEL system that is addressable in smaller sub-segments. Given our strong automotive VCSEL offering, we are actively engaged with additional tier one suppliers in several regions for LiDAR illumination. As mentioned above, we are also addressing sizable opportunities in other new automotive optical and 2D, 3D sensing, such as in-cabin monitoring. We are moving ahead in development of an in-cabin 3D sensing solutions for a tier one supplier in time-of-flight technology. Next to this, we are able to address multiple content opportunities and different system designs. In this market, the SmartSens partnership I mentioned before allows us to accelerate development in certain areas by several quarters. Additionally, we see attractive momentum in automotive project lighting.
Here, applications for minimized projector solutions are bound to expand from today's focus on comfort to innovative safety and lighting features. We are looking to leverage specific optical technologies in differentiated automotive lighting applications and are starting to see good market interest. Our industrial business recorded attractive results in the second quarter and first half. Despite an overall less favorable market demand environment in the industrial business continue to contribute for broad-based applications. Our imaging business is seeing ongoing positive momentum reflecting our leadership in global shutter technology. As previously mentioned, the partnership with SmartSens for high-performance near-infrared sensors leverage our combined IP in this area needed for our medical business, was again successful in the second quarter with digital imaging and miniature camera applications. In the growth region Asia Pacific, we see ongoing positive traction in medical imaging enabling us to strengthen our market position.
Market momentum for our micro camera technology continues to increase as applications opportunities for these nearly invisible cameras expand into additional end markets. Looking at our operations, we have been able to significantly improve the efficiency of production processes in Singapore, resulting in more efficient staffing and materials usage. These advantages are driving clear benefits for our operational performance as capacity utilization increases with expected higher product volumes in the third quarter and second half. The strongly higher VCSEL volumes we are shipping this year compared to last year are supported by our outsourced supply chain, which we have expanded and which comprises several partners. Our internal VCSEL production line is moving towards the expected start of the multi-quarter production ramp planned around year-end, as previously mentioned. Our capital expenditures are development as expected in line with previous expectations.
We see a significantly lower CapEx for 2019 compared to last year. Reflecting this expectation, the dominant share of expenditures were completed in the first half of 2019. We recently confirmed that we have engaged in discussions with OSRAM Licht AG regarding a potential transaction. We require M&A opportunities to be strategically compelling and demonstratively value enhancing. For larger transaction, financially accretive, achievable with a sustainable capital structure and fitting ams financial model. Against this background and under the circumstances at that time, we did last week not see a sufficient basis for continuing the discussion with OSRAM.
However, as part of our technology-led M&A strategy, we continue to evaluate all opportunities with the objective to create value for our shareholders while satisfying the criteria I just mentioned, and have today decided to reevaluate a potential transaction with OSRAM. In addition, we were recently approached by potential financial partners and have exchanged views which confirm our belief that we can arrange prudent and committed financing for this potential transaction. Let me now come to the outlook for our business. For the third quarter 2019, we expect strong sequential and year-on-year growth, which will be driven by high volume ramps in smartphone sensing while our other end markets continue their contribution to other results. Based on available information, we expect third quarter revenues of $ 600 million-$640 million, up 49% quarter-on-quarter and 29% year-on-year at the midpoint.
This strong growth reflects the strength of our portfolio in high performance consumer application, such as 3D and light sensing. On the basis of current information, we also expect the third and fourth quarter to show a comparable revenue scale. We are benefiting from higher capacity utilization and positive effects from the significant improvement in operational and manufacturing performance we have achieved since the beginning of the year. We therefore expect the adjusted operating margin for the third quarter to increase strongly to above 25% of revenue, more than doubling quarter-on-quarter and up more than 90% year-on-year, which I regard as an impressive achievement. Based on this positive outlook, we currently target leverage in terms of net debt to EBITDA to decrease significantly to a level of below 2 at year end 2019. Let me now hand over to Michael for a detailed look at our financial results.
Thank you, Alex. Good morning, ladies and gentlemen. As usual, it's my pleasure to give you an overview of our IFRS and adjusted numbers for the second quarter and first half 2019. Let me start with our P&L at the top-line development. As Alex already mentioned, our second quarter group revenues were $415.2 million in the upper half of our previous guidance. We're very happy about this performance, which we achieved despite a more muted demand environment in our end markets in the first two quarters. We saw very nice growth in the second quarter as Q2 revenues increased 8% sequentially from the first quarter and grew a remarkable 72% compared to the second quarter last year. Our adjusted gross margin excluded acquisition-related and share-based compensation costs was 37% compared to only 15% in Q2 last year. A very strong increase of more than 20 percentage points.
Adjusted gross margin also increased by 5 percentage points quarter-on-quarter. These gross margin developments reflect higher capacity utilization as well as first positive effects from the significant improvements in our production processes in Singapore. Our IFRS reported gross margin was 35% compared to 9% in Q2 last year. Our R&D spending in the second quarter was $76.9 million in line with our plans and increasing from $57.4 million in Q2 last year. In relative terms, we spent 19% of revenues on R&D in the quarter. Our continued strong R&D spending supports a range of platform developments and large product opportunities, including automotive LiDAR for ZF, Ibeo, and others, as well as innovation in consumer optical sensing.
While there are always quarter-to-quarter movements in R&D spending, we expect lower levels of spending relative to revenues going forward as we target to return to a level of well below 15% of revenues. Further down in our P&L, SG&A costs were $47.4 million compared to $40.1 million in the second quarter last year. In relative terms, we spent 11% of revenues on SG&A in the quarter, which is an attractive achievement. We work on further improvements relative to revenue going forward as we target a level of well below 10% of revenues on a full-year basis. Our other operating income of $2.1 million for the second quarter compared to $1.9 million in Q2 last year resulted for the most part from R&D support grants from Austrian and European R&D programs, which are tied to dedicated R&D spending for these programs.
Given these developments, our adjusted operating result or EBIT, excluding acquisition-related and share-based compensation costs for the second quarter was $50 million or 12% of revenues, which was nicely above our previous guidance of around 10%. This is a significant increase from a loss of $46.4 million or - 19% of revenues in Q2 last year. The IFRS reported result from operations or EBIT for the second quarter was $21.9 million or 5% of revenues, up from - $72.8 million in the same period 2018. Our net financial result came in positive at $5.1 million compared to $42 million in Q2 2018. Last year's financial result was heavily skewed by changes in the valuation of the option element of our US dollar convertible bond, which we recorded as required by IFRS rules.
In contrast, the financial result for this quarter was positively impacted by effects from our convertible bond buyback. As announced in March, we started the buyback program for our outstanding US dollar and EUR convertible bonds for a maximum market value of $100 million, taking advantage of the favorable market pricing. By the end of the second quarter, we had bought back convertible bonds with a face value of $106 million, spending $75.5 million. Through this, we have reduced our net debt and achieved a meaningful financial result benefit at the same time, which we're extremely pleased with. As of now, we have bought back CBs with a face value of $115 million, spending $82 million. The total recorded net debt reduction will be even higher. Consequently, the adjusted net result for the second quarter came in at $25.1 million compared to - $99 million in the same period in 2018.
Adjusted basic and diluted earnings per share were CHF 0.31 and $0.28 compared to CHF -0.24 and CHF -0.19, and $-1.19 and $-1.15 for the second quarter 2018. Our total backlog at the end of June stood at $304 million, compared to $285 million at the end of Q1 and $526 million on June 30th last year. Our current backlog is significantly higher at over $ 600 million. In this context, intra-quarter business has come to play a more meaningful role for our total business, especially on the consumer side. Let me give you some additional figures from the balance sheet and the cash flow statement to complete the picture. Our cash and cash equivalents stood at a comfortable $481 million at the end of the quarter compared to $639 million at the end of the first quarter.
This change mainly results from the aforementioned convertible buyback program, as well as the planned repayment of certain bank facilities to save interest expenses. Our trade receivables stood at $180 million, up from $125 million at the end of the first quarter. Our DSO ratio was 41 days, up from 35 days in the last quarter, but significantly down from 80 days in the second quarter last year. This DSO level is well within the range I like to see. Inventories, on the other hand, were slightly lower at $380 million compared to $321 million at the end of the first quarter, while the finished goods portion of our inventory is now meaningfully below 25% of total inventory. On the liability side, we have a current debt position of $300 million at the end of June, while our long-term debt stood at $1,568 million.
Our net debt position was $1,387 million at the end of Q2. Our long-term debt was generally taken on to bolster liquidity, support the major CapEx cycle, which has been completed, and to create flexibility. As mentioned before, we have repaid some credit facilities this quarter to save interest expenses. Our operating cash flow in the second quarter showed a very healthy increase to $50.7 million compared to -$ 69 million in the same quarter last year. We expect to continue to see strong cash flow generation over the course of 2019, driving a meaningful positive free cash flow for this year, taking into account much lower CapEx and our strong business outlook. Based on this positive outlook, we currently target leverage in terms of net debt EBITDA to decrease significantly to a level of well below 2 at year-end 2019.
Our CapEx in the second quarter was $48 million, 70% lower than last year's Q2 spending of $155 million. As mentioned before, we expect full-year CapEx for 2019 to be significantly lower than last year, with the dominant share of expenditures completed in the first half of 2019. With that, I would like to open the floor for questions. Thank you very much for your attention.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handset while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Janardan Menon, Liberum, please go ahead.
Hi, good morning. Thanks for taking the question. two short ones from me. One, can you just explain what exactly is the rationale for you to pursue OSRAM? What do you think you can get specifically from that company, either in terms of revenue synergies or cost synergies or additional markets, et cetera? The second one is, your strong guidance into the second half of the year, especially into Q3. Can you qualitatively give us a feel for how much of that is coming from your largest customer versus additional shares and ramps on the Android side? Thank you very much.
Yeah, thanks for the question. Alex here. To the first question, a potential transaction would enable additional growth opportunities, enhance our strategy positioning by broadening our portfolio of visible and invisible light emitters that we can include in our optical sensor and illumination solutions. On the second question, and in addition to that, our strategy, in general, is totally unchanged. Our goal is clear leadership in major sensing markets as a diversified business, as we use M&A to accelerate the strategy with a focus on technology. Both points are the rationale on a high level for this potential acquisition.
Just to narrow that a bit, is it more to try and get into the automotive market, or is it that they have certain technologies and manufacturing capacities which you find desirable?
As we mentioned before, our prime focus is to address M&A based on technology. That's the prime focus. On Q3, the strong growth is a combination. Certainly, it's a strong business with our largest customer and their volume plans, which is very clear. Also a strong second quarter we see with our Android business, and especially in the strongest second half, and especially with the good revenues coming from Behind OLEDs light and proximity sensing and the 3D adoption we are seeing in the Asian market.
Got it. Thank you very much.
The next question comes from Andrew Gardiner, Barclays. Please go ahead.
Good morning, gentlemen. Thanks for taking the questions. I've got two fairly similar ones, perhaps, sort of with a slightly different tack. Just in terms of the second half visibility, Michael, you mentioned the backlog has effectively doubled in the last three weeks since quarter end. I suppose you'd always anticipate orders to come in strongly as the supply chain's ramping for the second half, but is this increase in the backlog greater than what you had been planning for internally? If so, can you help us understand what's driving it? Would it be more units in terms of the end market? How is pricing trending for you in the second half? Then I've got another one on OSRAM after that.
Yeah. Thank you, Andrew. It's Michael. It's clearly only how the customers run their supply chain. As I mentioned before, in the consumer space, these cycles become shorter and shorter in the last quarters.
Okay. I suppose relative to what you had been planning for earlier in the year in terms of the production ramp, is the demand stronger than you had anticipated?
It's along expectations.
Okay. Just on OSRAM. Alex, I sort of understand what you're saying in the answer to the prior question in terms of broadening the portfolio. Just in terms of the criteria that you guys have set out, though, in particular around the fitting with ams's financial model and leverage. Even if I look at the restructuring that OSRAM is undergoing at the moment and sort of trying to transition their business away from some of the legacy areas to more growth, sort of in technology-led growth areas, they're still only targeting high single-digit revenue growth, maybe mid-teens EBITDA margins, materially lower than what ams is achieving at the moment and based on your pipeline and improving efficiencies, would expect to deliver later this year and into 2020.
Clearly, given their size, you're talking a lot of leverage to be raised and some equity funding there as well. It seems you're stretching the balance sheet again to achieve that. I'm just not sure. I don't see how it fits with all of your M&A criteria that you've laid out. Can you give us a little bit more detail there?
Yeah, Andrew, it's Michael again. As Alex said before, we look at this, and if it fulfills the criteria, then we're going to pursue it.
Yes, just in terms of then how it lines up. I mean, the financials that we can see and the model that OSRAM has put out there, it isn't obvious how it does line up. Further detail in terms of how we could see that would be helpful.
Well, yeah, that's why we're looking at it. If it fulfills our criteria, we have interest.
Okay. We will stay tuned, I suppose.
The next question comes from Sandeep Deshpande, JP Morgan. Please go ahead.
Yeah. Hi. Thanks for letting me on. Two questions, if I may. You talked about Android contributing to the third quarter revenue ramp that you're seeing. Could you comment on, is this mainly happening in 3D sensing with structured light, or is it with time of flight, or is it with the other sort of 3D sensing that you do? Can you talk about how the utilization is moving? Your gross margin improves very dramatically into the third quarter. I would assume that there will be some of the stereovision and 3D sensing in there, which doesn't necessarily add so much to your capacity utilization. Finally, regarding overall in terms of your product ramp up into the second half. You've talked about fourth quarter being similar to third quarter. Can we understand why the seasonal trajectory is changing somewhat?
Because typical years in the past, not last year, fourth quarter, because of how your main customer ramped up, used to be much bigger than the third quarter. Thank you.
Yeah, thank you for the question. The first part, the ramp we are seeing in the third quarter, in the Asian market, Android market, is a mixture of, as you said, of 3D, which is where we see a very strong adoption rate of time-of-flight, especially for world-facing application. On top of that, we see a very strong traction, as I mentioned before, on the Behind OLED products offering we have. Actually very strong traction. Based on that, we see obviously a better utilization on our manufacturing side. The reference for Q4 and to Q3, Michael will answer.
Yeah, thank you, Alex. Yes, it's Michael here. To your gross margin question, if I may take this first. It's clearly based on the product mix we see for the third quarter, and as I mentioned, the manufacturing efficiency in Singapore, which we already indicated earlier. Q3 versus Q4 is that they're currently clearly based on customer forecasts, which are available to us, and this makes this year look more equally distributed within the second half.
Thank you.
The next question comes from Sébastien Sztabowicz, Kepler Cheuvreux. Please go ahead.
Yeah, hello, thanks for taking my question. One on Behind OLED light and proximity sensor, because this technology seems to gain a lot of traction in the market. Could you please elaborate a little bit on the competitive landscape there? Is there any other competitor shipping in the market right now? The second one is on VCSEL. Have you seen any change in competitive landscape in the VCSEL market, as it seems that Vixar, which is now part of OSRAM, is gradually taking good traction in the market with notably a potential design win in the next Galaxy Note10. How do you compare in terms of performance with their own technology for VCSEL?
Yeah, thanks for the question, Alex here. Behind OLED, I very appreciate your question because actually we don't see a competitor there today. You have to imagine if you put sensors behind the OLED, compared to a sensor which is beside the OLED, only 4% of the light can go through the OLED display. That requires a very sensitive and accurate, precise sensor where we are able to design it. That's why we see ourselves very strongly positioned there, and the traction we see with our customer base is very encouraging. On the VCSEL side, I have to admit, we are really gaining market share in the Android space significantly. I mentioned this in my report. We see a very strong position going forward. We don't see a change in the competitive landscape from today's point of view.
Should we understand that Vixar could be a good addition to your VCSEL technology, or you don't see any good fit with that?
We don't comment at this point of time on that.
Okay, thank you.
The next question comes from David Mulholland, UBS. Please go ahead.
Hi. Just a couple of questions. Firstly, just on OSRAM. I wonder if you could give us a little bit more clarity on really what changed from last week to this week, and particularly in terms of the financial party, and if you can give us any color on the type of party that is. Secondly, if you could just give us some clarity on what the timeline is, how long you might take, or how long you're giving yourself, to kind of come to a conclusion on this. Finally, just in terms of the core business, I wonder if you can talk a little bit in terms of the pickup in Q3, how pricing looks particularly for your largest customer business on a year-over-year basis. Have you started to see some of the benefits that had been hoped for last year? That'd be really helpful. Thanks.
Yeah. Hi, David. This is Michael. Unfortunately, we cannot comment further on the OSRAM topic. For the other question, I hand over to Alex.
Yeah. David, on Q3, as we mentioned, we see a very good traction for the whole business there. We see that the market gets stronger. Specifically for a new product introduction we have in our pipeline, we see a very strong position with our customer base across the board for all our mobile customers.
Just one quick follow-up. As you start to look into next year, I wonder if you could talk a little bit about how you feel the pipeline is building in the Android space around 3D with a 2020 viewpoint to it?
We see this very positive. It's according to our plan. We're very positive on product.
Okay. Thank you.
The next question comes from David O'Connor, Exane BNP Paribas. Please go ahead.
Good morning, gentlemen. Thanks for taking my question. One or two from my side as well. Going back onto OSRAM once again. In the press release last week, you mentioned the $1.7 billion potential capital raise. Is the capital raise still on the table, or would the new financing partners remove the need for a capital raise? That's my first question. Secondly, again, just touching upon the Q3, and the very strong guidance there. How much of that can you categorize as contents versus units? Thanks.
Well, on OSRAM, as Michael mentioned before, we will comment when we made up our mind and went through the process we just started. Can you repeat the second question? Sorry, I didn't get one.
Yeah, sure. It's just on the very strong guide for Q3. Just wondering there if you could give us any color on how much of it was driven by content versus unit.
Well, a lot of content. For example, behind OLED device is significantly higher ASP and content compared to the light sensor, which is visible. The new product introduction we brought into the market for the second half, is really driving content. Of course, market share, as I mentioned before, in the Android space. It's a combination of both.
Thank you.
The next question comes from Robert Sanders, Deutsche Bank. Please go ahead.
Yeah, good morning. Thanks for taking my question. I just wanted to ask about this move towards edge-to-edge displays. There's been a lot of talk about smartphone OEMs, including your largest customer, moving to edge-to-edge displays, moving to time-of-flight from structured light, and for the front-facing application. Would you see that as a net negative for you, given the risk to your existing facility in Singapore, given the potential risk of massive underloading, or would you see it as a net positive given higher complexity, potentially a position in time-of-flight winning sockets and potentially use of WLO in time-of-flight?
Yeah, thanks for the question. We repeat it on a regular basis that we are very strong position in all three technologies, active stereo vision, time-of-flight, and structured light. In time-of-flight, we are even expanding, doing two technologies, indirect and direct time-of-flight. Whatever the market decides where to go, we are prepared to provide customers the best performing solutions. We are very prepared for that.
Just following up on that, what would you say the sort of attach rate of WLO is in time-of-flight right now versus just using a polymer lens?
I don't think that's the key topic. I think that's just not the key topic for us. We are extremely flexible what customers like to get from us, and the key focus for us is to provide value in the total illumination and the best possible performance for our customer base.
Okay. Thank you.
Yeah.
The next question comes from J ürgen Wagner, MainFirst Bank. Please go ahead.
Yeah, thank you for taking my question. In your handout, actually, you mentioned that you develop under-d isplay 3D. When do you believe you will have such a product available, how quickly that could be adopted? Then a second follow-up or indirect follow-up on OSRAM. You mentioned when you said that you are looking at them, that you or any strategic deal would require a prudent financial structure. Can you explain the financial leverage range behind that prudent financial structure and how long you would be willing to be outside this range in case a strategic deal happens? More general question rather than specific to OSRAM. Thank you.
Thanks for the question. I'll take the first one. On 3D behind OLED, we working on a roadmap to address this. We will announce at the moment we have products available, and certainly we'll discuss it intensively even earlier than that with our customer base. If you just look at the example of light and proximity sensing behind OLED, there was basically no talk in the markets before we introduced this product, and we prefer to keep it that way. I think it's important to understand that the whole move of the market goes that you make all the sensors invisible for the consumers, that you have the largest display possible on your phone with no bezels. We have the right roadmap to support our customers to make this happening.
I think the nice part of this is you don't need a new application or use case. You just create a phone which looks much nicer with the same or better functionality. Since we are the leader in this area, we put all efforts into to stay as a leader and accelerate the gap to our competitors.
Okay.
Jürgen, it's Michael. With regard to OSRAM, again, a potential transaction has to meet the five criteria that we have set for evaluating an M&A opportunity. If we contemplate a large-scale M&A, I would only be willing to accept the higher leverage for a period that is short, but I would make sure that resulting leverage is below the historic maximum we have seen for ams last year.
Okay. That's clear. Thank you.
The next question comes from Achal Sultania, Credit Suisse. Please go ahead.
Hi, good morning. Just a question on gross margins. It seems obviously gross margins probably going to reach low to mid-40% in Q3 based on your EBIT margin guidance. Clearly, you've seen benefits of both cost-cutting and high fab utilization. Going forward, how should we think about the puts and takes here? Are we done with the cost-cutting element and efficiency in your Singapore fab and further improvement from here on is basically driven by product mix and more fab utilization, or can we see some more benefits of cost-cutting or efficiency yet to come through as we go from Q3 levels? Thank you.
Yes, this is Michael. I'm happy to take your question. Absolutely. We plan to improve our manufacturing, and what we get out of it constantly, and that's why we also expect an incremental increase of these numbers going forward.
Okay. Just one further clarification, Michael, on the Q4 margins, is there going to be any short-term small headwind because of the VCSEL ramp, or that's not going to be any factor going forward, maybe in Q4 or Q1 early next year?
There is no meaningful impact to be expected for the fourth quarter.
Okay. Thank you.
Thank you, ladies and gentlemen, for your questions. With this, we would like to close the question and answer session for today. We thank you for joining us this morning. We look forward to speaking to you again at the next opportunity. Thank you very much. Have a good day.
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