Ladies and gentlemen. Welcome to the ams full year and fourth quarter 2018 results conference call. I'm Miruna, the 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 questions 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. At this time, it's my pleasure to hand over to Mr. Alexander 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 the full year and fourth quarter 2018 results. Please note that there is a presentation available for this call, particularly for the financial section of the presentation. This can be found on our website at ams.com in the investor section under the presentations tab. With this, I would like to hand over to Alex Everke, our CEO. Alex, please.
Thank you, Moritz. Good morning, ladies and gentlemen. I'm very happy to welcome you to our full year and fourth quarter 2018 conference call this morning. Before I start to discuss our business, let me add a few general comments. We have seen a more difficult year 2018 than we had originally anticipated, especially towards the end. The development of important end markets on customer demand was unexpectedly worse than what we had thought. At the same time, we were able to achieve strong growth last year, and I'm happy to report this despite the difficulties encountered. 2019 is starting out on an unfavorable note as well as we see the tough market environments continuing with volatile end market dynamics that are hard to anticipate.
We do not take this development lightly and are committed to do our best to work through challenging times. I'm convinced about our strategy and the steps we have taken and are taking to implement it. There has been no change to my conviction, and I, together with the very strong team at ams, are committed to continue to take the company forward using our strong long-term platform for leadership in our focus areas. Let me now discuss our business. Starting with some key financial figures, Michael will later take us through the financials in detail. We have achieved strong growth for the company in 2018, with revenues growing 34% to $1.627 billion, a record for ams. Our fourth quarter revenues played an important role in this, reaching $491 million, up 4% sequentially and very in line with our updated expectations.
Our adjusted EBIT was $146 million for the year, while adjusted EBIT for the fourth quarter was $62 million, or 13% of revenues, well in line with our updated expectations. Our strategy for leadership in optical imaging and audio sensing was the key driver for the substantial growth we recorded last year. In the fourth quarter, we faced unexpected weakness in customer demand in our consumer business, which resulted in an update to our original expectations for the quarter. Our consumer business was nevertheless our main growth driver last year, with optical sensing once more the largest business area for ams. Optical solutions for 3D sensing and advanced display management were important revenue streams in 2018. In the fourth quarter, the performance of these lines were lower than originally expected.
As the leader in optical sensing, we offer a broad portfolio of high-performance solutions for 3D sensing, including pixel-based illumination, True Color and other display management, advanced proximity sensing, spectral sensing, and other optical applications. We are a leader provider for 3D sensing technology and ramp significant 3D sensing volumes for a major global smartphone platform in the second half of 2018. Looking at the 3D sensing market, we see an ongoing coexistence of the 3D sensing approach to structured light, time-of-flight, and active stereo vision as 3D sensing adoptions in mobile devices is moving ahead. We have been able to win designs in all three 3D sensing technologies and expect more 3D sensing-enabled devices to be launched this year. From our OEM engagements, we do not see one dominant technology emerging.
Technology choices in 3D will continue to be driven by application, performance, software, solution partner, size, and cost considerations. In the 3D market, we are successful with our current strong focus on 3D system illumination, winning at OEMs and leveraging superior pixel performance across technologies. Here we are working alongside different image sensors vendors, and I would like to briefly elaborate on this. Working alongside image sensor vendors means that in a specific 3D system, we may be covering the illumination on the transmission side and an image sensor vendor, the sensor hardware on the receiving side. This is already the case at multiple OEMs and in solution designs today, and we therefore don't see an overlap or competitive issue with the image sensor vendors out there.
We have enabled 3D systems using different image sensor vendors and are able to address all system approaches, including implementations for structured light, time-of-flight, and active stereo vision, which we are either seeing already or expect to come to the market. This broad traction underlines our system capabilities and the strengths of our 3D illumination portfolio, covering structured light spot projection, structured light auxiliary, and time-of-flight flood illumination, time-of-flight proximity sensing, and active stereo vision pattern projection. With design wins in structured light, iToF, and active stereo vision, we provide VCSEL illumination solutions for a range of Android 3D devices which are either launched or expected to be launched this year. Leveraging our solution know-how, we started shipping first VCSEL and 3D sensing products to Android structured light 3D face recognition to two Asian smartphone OEMs last year.
Previously mentioned Android iToF design wins for 3D programs at two Asian smartphone OEMs are built on our illumination expertise and are either shipping or expected to ship in the first half of 2019. We first mentioned development efforts for active stereo vision last summer, given the technology's interesting potential to combine attractive 3D performance with cost efficiency and implementation advantages. At the recent CES trade show, we presented a high-quality active stereo vision implementation for 3D face recognition in partnership with leading 3D software provider Face++, mobile application processor leader Qualcomm Technologies, and 3D software specialist Bellus 3D. This solution, where we contributed the VCSEL illumination module and system design expertise, is an excellent example for an ecosystem partnership as industry participants are highly interested to engage with us.
We have separately won a design in active stereo illumination and expect first active stereo 3D systems in Android smartphones this year. In active stereo, we believe upcoming reference designs will enable quicker and easier implementation of 3D sensing for Android OEMs, which we believe will drive adoption of active stereo. We address both front-facing related and world-facing application based on our leading portfolio in 3D sensing. For world-facing 3D sensing, we realistically expect another multi-year timeline of adoption as applications and solutions continue to evolve. Supporting early adoption, we recently finalized an illumination solution for world-facing 3D sensing system at a major Android OEM and see volume shipments starting in the current quarter. I'm very excited that our differentiated VCSEL technology offers competitive advantages for 3D sensing that are being recognized in the marketplace.
Together with our 3D system know-how, we are able to drive strong market and design traction for our VCSEL solutions in structured light, iToF, and active stereo. We expect to establish a significant market position in high-power VCSEL for 3D sensing over the next years. Our engagement with OEMs and ecosystem players and our ongoing development efforts are behind our leadership position in 3D sensing, which is built on our recognized solution capability and system expertise across all 3D technologies. Looking at other optical sensing, we reinforce our market leader position in display management, light sensors, including True Color, ambient light, and proximity sensing. We've shipped a wide range of display management solutions to a broad base of customer OEMs, which included significant volumes of True Color solutions that we ramped in the second half of 2018 and very small-scale proximity sensing for audio accessories at a major OEM.
At the recent CES trade show, we officially introduced an innovative solution for light and proximity sensing behind OLED displays, which enables maximum screen-to-body ratio and bezel-less phone designs. We previously reported first design wins in this technology and have recently started volume shipments for these wins to a leading Asian smartphone OEM. Elimination of the bezel is a key theme in the smartphone market, we are seeing additional OEM interest for this technology. We continued significant R&D activities for new and future optical sensing and VCSEL illumination technologies last year. We are working to finalize a miniature consumer spectral sensing solution with a major consumer OEM, where we are ironing out the details and expect shipments to start in mid-2019. Audio sensing was another growth area for ams in 2018, showing continued good performance in the fourth quarter.
We again saw solid volume growth in MEMS microphone interfaces last year, where we are the market leader, given the ongoing market success of home assistant devices with multiple microphone contents. We are also a leader in the growing market for ear and headphone Active Noise Cancellation, or ANC, serving a broad base of accessory and device OEMs. Here, we recently introduced a highly miniaturized, high-performance ANC solution for wireless earbuds. New technologies such as our single cable power and data interface and hybrid ANC are seeing market traction and offer additional opportunities going forward. We also see potential for audio sensing to support future machine hearing applications in the coming years. For the previously reported opportunistic power component win in a consumer charging application, we expect mass production this year as expected.
In autumn 2018, we decided to de-emphasize development efforts in the environmental sensing and focus relevant resources on very attractive mid and long-term growth opportunities in optical technologies. Based on the decision, we have already implemented steps to internally redeploy R&D resources to its optical sensing focus area. We are actively exploring strategic options for parts of the environmental sensing business. Following these streamlining efforts, we can pursue a more focused strategy around our strategic pillars, optical imaging and audio sensing, which are core drivers for differentiation for us. Let me now look at the non-consumer side of our business. Our Automotive, Industrial, and Medical business performed well in 2018, serving advanced sensing applications in a range of end markets. Our automotive business showed attractive growth in 2018.
Focus on safety, driver assistance, autonomous driving, position, and chassis control, our automotive portfolio is strongly positioned toward structural growth areas in automotive sensing. Supplying a range of leading automotive system suppliers, we see increasing customer interest in Asia, including Japan. We expect a more muted development of automotive demand in the coming quarters, reflecting the prevailing industry and macroeconomics environment. In automotive lidar, development activities continue for a large reported 3D lidar program for a VCSEL array and driver illumination system at a global automotive supplier. The U.S.-based automotive lidar startup working with us presented their latest 3D lidar solution incorporating 128 VCSELs at the recent CES trade show. Lidar and 3D technologies are gaining increasing OEM intention for automotive applications. We offer VCSEL and optical sensor expertise and system know-how for high-performance optical implementations.
Design activities for the first in-cabin 3D sensing project are progressing among increasing OEM interest. In this area, we see potential to leverage our system expertise in iToF and active stereo. Our Industrial business recorded another successful year. As a leader in industrial sensing, we offer a wide range of differentiated solutions for industrial automation, factory automation, harbor, and other industrial markets. Manufacturing, harbor, industrial IT, and other application markets continue to see increasing demand for sensor-based data acquisition. We expect new sensing technologies, including 3D sensing, to create further growth opportunities in the coming years. Industrial imaging and machine vision was particularly successful last year, winning new designs for our industry-leading global shutter technology. We brought innovation to the market and remain at the forefront of growth applications in high-performance image sensing. Our Medical business showed a good performance again last year.
As market leader in medical imaging for computed tomography and digital X-ray, we successfully ramped first solutions for a new Asian medical imaging OEM and see continued good market traction in Asia. We also introduced the latest generation of our micro cameras last year, offering the world's smallest camera system for endoscopy. Based on this exciting technology, next generation medical endoscopy continues to be a growth area for ams. Looking at operations, we completed a substantial expansion of manufacturing capacity in our Singapore locations last year to support customer plans. At the same time, we achieved major efficiency improvements and reduced process times in several production areas. These have resulted in a lower utilization of our expanded optical manufacturing through the deposition capacity. We expect this situation to continue to create operational headwinds this year.
On the positive side, these advances in manufacturing allow us to expect very significantly lower capital expenditures for 2019 compared to 2018, which will support our financial strength. Our in-house wafer manufacturing capacity in Austria was again fully utilized through 2018. Construction of our internal VCSEL production line continues with limited equipment investment remaining. We see further differentiation opportunities in both design and manufacturing of high-power VCSELs, which are keen to be explored through this manufacturing investment. To optimize operational and cost effects of the wafer manufacturing line as part of our total VCSEL capacity, we have adapted the front-end production ramp of the line to be planned start around the end of this year. In line with previous expectations, we will cover anticipated VCSEL volume needs for this year through our established outsourced supply chain.
Given the current volatile capital market environment, as we do not see additional capital needs at this point of time, that would drive a shares placement, we have decided to postpone the planned secondary listing at the Hong Kong Stock Exchange. We successfully completed the pre-acquisition jurisdiction admission process for Australia in December, expect to pursue the planned secondary listing at a later point in time. Let me now come to the outlook for our business. For the first quarter 2019, we expect revenues to reflect the current, more unfavorable end market environment and the subdued smartphone demands we are experiencing, effects that add to characteristic consumer markets seasonality in the first quarter. As a result, we expect first quarter revenues of $ 350 million-$390 million based on available information.
This reflects a continued unfavorable dynamic in the consumer market, in particular, while macroeconomic and general industry trends do not appear to offer additional support. Despite these additional influence, our revenue expectation for the first quarter is not significantly different from typical first-quarter seasonality in the past years for the consumer supply chain that we are part of. We anticipate lower production volumes in our consumer business in the first quarter, which will in turn impact our profitability. We therefore expect an adjusted operating margin for the first quarter in the low single-digit percentage, which is similar to the levels we saw in the first quarter 2017. Even in light of these effects, we see the potential to generate a small positive operating cash flow for the first quarter based on current information.
We are generally experiencing growing end market volatility, customer performance that is becoming more difficult to anticipate, and ongoing uncertainty regarding end market demand trends, industry development, and the macroeconomic environment. Reflecting the situation, we have decided to continue to provide detailed financial guidance on a quarterly basis for each upcoming quarter and to discontinue other numerical guidance. Despite this more difficult environment we are operating in, I would like to reiterate that I'm convinced of the strengths of our strategic position, our competitive technology advantages, our customer traction, and the longer-term growth potential for ams. Let me now hand over to Michael for a detailed look at our financial performance.
Thank you, Alex. Good morning, ladies and gentlemen. As usual, it's my pleasure to give you an overview of our IFRS consolidated and our adjusted numbers. For those of you who followed the presentation, let me start right on page 19 and jump into the details of our P&L. We saw, as Alex mentioned before, revenues coming in on a record level of EUR 1.627. billion in 2018, a 34% increase year-over-year compared to EUR 1.2 billion and EUR 13.8 million in 2017. Q4, although, reflects the unfavorable consumer market environment and the subdued smartphone demand we have seen. In Q4, our revenues declined by 8% from EUR 536.6 million in Q4 2017 to EUR 491.4 million in Q4 2018. In line with our typical seasonality, we have seen a significantly stronger business in the second half of 2018. On the next page 20, you can see our revenue distribution.
The regional split, obviously, as usual, doesn't say a lot to customer distribution, did not change very much in 2018. Billing locations changed. The supply chain is obviously defined by our customers. On the right side of the page, you see our development by markets. We have seen a strong increase in our consumer business for over 70% of our total business. Also given less attractive automotive, industrial, medical end market development towards year-end. Within the AIM segment, automotive did very well. Industrial obviously remained the largest part within that segment. Our backlog at year-end 2018, what you can see on the next page 21, reflects the unfavorable market environment we have seen towards the end of the year. Lower smartphone demand and also typical seasonality. We also see shorter ordering cycles of our customers.
Our gross profit margin on page 22 reflects the product mix, the strong underutilization of our manufacturing sites in Singapore, mainly driven from the first half or coming from the first half of 2018. Gross profit margin decreased from 43% in 2017 to 31.7% in 2018. In absolute terms, there was an almost flattish development. Q4 gross profit margin came in at EUR 174 million, or 35.4% of revenues. These are adjusted numbers. Our IFRS numbers show 27.2% gross profit margin in 2018 and 28.2% in Q4 respectively. As you may recall, we had a very weak gross margin in the second quarter 2018, which played into the full year development of the gross margin. In addition, a less favorable product mix in the second half resulted in less attractive gross margin, as well as lower than expected utilization in the second half and in the fourth quarter.
Q4 gross margin was in line with expectations, though. A solid result despite the lower than expected revenues. I would like to add that we had one-time restructuring costs in Q4 2018 regarding customer-related equipment in our manufacturing, which is not included in the adjusted gross margin. This is regarding customer-related equipment that we planned for, but the underlying capacity requirement did not materialize, and we did not add the equipment. We had to take a charge for costs related to not taking up the equipment. This one-time effect amounted to $24.6 million in the fourth quarter of 2018. Further down the P&L, you'll see our R&D expenses. We had a substantial increase in absolute terms from EUR 244 million in 2017 to EUR 273 million in 2018. High R&D investments continued through 2018 for large projects in our consumer and non-consumer markets.
In relative terms, we have seen a substantial decrease in 2018. Q4 2018, however, shows some year-end effects. This is clearly not the role model for the future. In Q3 2018, for example, our R&D spending was $68 million. Our SG&A spending on the next page includes very selective improvements of the organizational structure and the global sales team. We continue to manage our SG&A expenses very well. We have seen a significant decrease in relative SG&A spending, showing the cost discipline in our business, and obviously the effects of lower revenues in the fourth quarter for some commission structures. Our operating result, our EBIT and EBIT margin for 2018, shows the gross margin impact of underutilization the first half last year.
However, lower than expected demand in the fourth quarter, product mix in the second half, and improvement related underutilization, plus the higher R&D costs in the fourth quarter. Our EBIT for full year came in at EUR 145.6 million compared to EUR 192.5 million in 2017. Our adjusted EBIT margin, therefore, was 8.9% in 2018 compared to 15.9% in 2017. The fourth quarter EBIT was EUR 61.9 million compared to EUR 146.6 million in Q4 2017, a 58% decrease. EBIT margin in the fourth quarter was 12.6%, right in line with guidance. We had a one-time restructuring cost in the fourth quarter 2018, as I mentioned before, for customer-related equipment in manufacturing, and we also had some expenses for restructuring in our environmental sensor business, which is reflected in our operating margin.
Looking at page 26 in our net financial result, we see a major impact of the US dollar convertible bond option component and its valuation effects. We are required on IFRS rules to record changes in the value of the option element of the foreign currency convertible bond as non-cash items in the group financial result. This was the case throughout 2018 and led to this very strong positive financial result. Our actual interest payments are low in comparison. Net interest paid for 2018 was actually $18.8 million. Our tax expense on page 217 of the P&L was again negative due to unwinding of historic tax structures, release of provisions, and different tax effects across our different locations. Still, we paid taxes last year in different countries, including Switzerland. The total tax payments amounted to around $13 million, which you can see in our cash flow statement.
We now come to our net income and earnings per share. Our adjusted net income was significantly impacted by considerable valuation effects of the option element of the US dollar convertible bond. We therefore report adjusted net result and earnings per share excluding the accounting-related effect from the valuation of that option. This is a non-cash distorting item, which is why this is being excluded. I mentioned this topic before in the context of the net financial result. However, this item was also the reason for the strong decrease of the adjusted net result, as over the course of 2018, this item turned into a very large positive figure, excluding it decreased the adjusted net result and EPS.
Our adjusted net result and EPS for 2018 came in at EUR 12.1 million or CHF 0.15 and CHF 0.14 respectively, which is basic and diluted, or $0.15 and $0.13 respectively in US dollars. In the fourth quarter, our adjusted earnings per share came in at CHF 0.02, basic and diluted, or $0.02 basic and diluted. Let me give you some additional information on the balance sheet. Turning to page 30. In a very positive working capital management in the light of the very strong business growth. Working capital at the end of 2018 shows a certain balance sheet date effect though, regarding trade receivables and liabilities. Here you can see the very tight management of our working capital. Generally, it remains a priority for us. Inventories obviously reflect a year-end effect from the current demand environment.
We saw a higher inventory base at the end of the year. On page 31, some information to our net debt, cash, and short-term investment situation. Our net debt increased considerably in 2018, mainly driven by further capacity investments in our Singapore operations. The strong increase in cash and cash equivalents reflect the strong second-half cash generation and the lower CapEx in the second half this year. Let me remind you that the large portion of debt are long-running convertible bonds, which mature in 2022 and 2025, respectively. We are well aware of the higher than desired leverage at this point in time and are very focused on improving the situation over time. I would expect also over the course of this year. As I said, cash balance is high and it strongly improved in the second half and towards year-end, given significant cash generation and lower CapEx.
Our cash at the end of the year was $713.3 million compared to $447.7 at the end of 2017. Our net debt increased, though, from $987.9 million at the end of 2017 to $1,362.2 million at the end of 2018. Let me give you some additional information on the cash flow. On page 33, operating cash flow was significantly better in 2018, and also in the fourth quarter when compared to 2017. The strong fourth quarter cash flow shows the capability of our business to generate high cash amounts, helped by lower CapEx. Free cash flow in the fourth quarter came in at $226 million US. Operating cash flow was $293.5 million in the fourth quarter alone. Let me turn to page 34 at the capital expenditures. After mentioning CapEx before, here it is.
We saw a strong CapEx in 2018 again. As mentioned, this year marks the completion of a major investment and CapEx cycle we have gone through. As you can see, CapEx already came down very significantly in the fourth quarter, also versus the third quarter. As we have mentioned, we expect CapEx for 2019 to be significantly below 2018 levels. With that, I would like to thank you for your attention and would like to open the floor for questions. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their 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 handsets while asking the question. Anyone who has a question may press star and one at this time. The first question comes from Andrew Gardiner with Barclays. Please go ahead.
Good morning. Thanks, gentlemen, for taking the question. Two, if I could. Firstly, just so Alex says regarding the increase in end market volatility and your quote around customer performance, it is difficult to anticipate. I am just interested in a bit more detail around how you guys are thinking about managing the business in such a challenging environment. You have been investing in new products where you seem to be getting design wins. The lack of certainty around what those design wins will mean in terms of volume and perhaps price. Certainly from our point of view in the markets, makes it challenging to model. I presume given what you are saying, it makes it more challenging to manage.
I suppose if I look at some of the other financial items that Michael, you just mentioned, backlog is down significantly year-on-year. It seems it is more than just sort of seasonal or macro. It is a significant reduction. You highlighted shorter order cycles. It sounds like you are getting much less visibility from the customer. What is your confidence in how things are going to develop over the course of the year and ability to utilize the CapEx you have put in place and work down the inventory, those kind of things? Just a bit more detail in terms of how you manage the business in such an environment would be helpful. Thank you.
Yeah. Andrew, thanks for the question. Of course, as I said, there's much more volatility than we have seen the year before. The way to manage the business, most importantly, first of all, as we announced, we got multiple more design wins, not only in the Android space but also in the non-consumer space. The more you diversify from large customers and have more customers on the plate with very leading technology, this stabilize the business. At the same time, we also were more careful in which kind of products we're taking on board, so we need to understand what the application is and how successful we anticipate the business. We are very careful in our R&D spending and in OPEX spending.
For example, that's the reason why we addressed the environmental business to utilize resources we have within the company for growth opportunities we have on hand right now without hiring more people. Lastly, I think most important is especially our CapEx spending. We mentioned it, that we expect the CapEx spending in this year significantly lower than we had last year. Because of better performance in our manufacturing line, we also don't need additional capacity. In general, strategically, the core for the company is to focus more on outsourcing wherever it's applicable, not utilizing own assets for future manufacturing.
Okay. Thank you. I understand you're not wanting to give more sort of numerical guidance as we look forward. Just thinking to the second quarter and comparing it to last year, clearly we had a significant drop in the 2Q last year that was quite unusual and related to customer-specific movements. Is there any reason at this point in time to anticipate a similar kind of drop this year, or do you expect it to be more normal in terms of seasonality?
As you can imagine, we cannot comment on the second quarter now, but what I could say is that certainly we see the second half of the year 2019 better than the first half. This kind of seasonality we clearly see for this year, but I can't refer to the second quarter.
Okay. Thank you.
The next question comes from Janardan Menon with Liberum. Please go ahead.
Hi. Good morning. I just wanted to know whether you can take an estimate of what your market share in illumination is right now. You are sort of focusing on illumination across all the technologies as your sort of core offering to the market. Given the design wins that have already come out and the design wins that you've either won or not won, what would be your estimate of market share? Also, as part of that question, what is the kind of price pressure that you're seeing in the VCSEL market? For a similar bid last year versus this year, what would be the rate of price erosion that you're seeing in the market? Maybe last question is on spectral sensing. Can you give us a small update, please? Thanks.
Yeah. Thanks for the question. I can't give specific numbers on market share, it's clearly we are leading in illumination. If you just add together what we have announced, the design win pipeline we are seeing, especially in our VCSEL arena, we are winning in the Android space, one design after the other. The encouraging sign we see is that it's really based on very differentiating technology what only we have. Going forward even, and we also announced is that this high power capability we have in our illumination business also drives the real future growth and significant growth in the 3D light automotive business. We are very confident that we are leading in this and continue to lead. Of course, we are also, as I mentioned in this call, addressing all three 3D sensing technology, structured light, active stereo vision, and time-of-flight.
On the pricing, we see similar. We don't see major changes in price pressure, but we see obviously there is price pressure, but we see very similar as in the past. I can tell you, the more differentiated technology you have, the less competition you have and the less price pressure you see. On the third question, on spectral sensing, we said we have a business we expect to ramp in the middle of this year. Good traction engagement with customers, understanding the feature you can address with spectral sensing, whether it's color matching, whether it's food analysis, utilizing those technologies in their end application. We see very good traction there.
Got it. Thank you very much.
The next question from the phone comes from the line of David Mulholland, UBS. Please go ahead, sir.
Hi. Thanks very much. I know you can't comment too much on absolute levels from Q2, but can you comment a little bit on mix and how you see, or could you say anything on how you see mix of customers versus last year? Obviously last year had a big issue with one key customer. Are there other ramps that are coming already in Q2 this year that you might have a more diversified business Q2 this year compared to last year? That'd be really helpful. Then just secondly, on the spectral sensing commentary, just a quick follow-up. I think in the past you've commented that you expected it to be somewhere in the kind of single-digit millions volume size. Any quantification on the kind of scale of ramp that you expect this year would be really helpful as well.
Yeah. David, thanks for your question. To the first one, I think you're raising a very good point. Based on the announcement we just did and did in the past, we do have a significantly better pipeline for the Android mobile business for first quarter and also second quarter and the quarters to come. This is a big difference to last year. Quite some volume is ramping already this quarter and will continue the following quarters. On the spectral sensing, I don't recall that we gave any numbers there, but we see small volume ramping mid 2019 for first applications coming to the market, and we expect the moment those applications are visible to other customers, will create more interest and more design wins for the future. We have seen this with other technologies in the same way.
That's great. Thank you.
The next question comes from Robert Sanders with Deutsche Bank. Please go ahead, sir.
Yeah. Hi. Good morning. My first question is just on your move towards more outsourcing. I was just wondering if you've done any work actually looking at a more asset-light strategy overall for your business, including such things as carve-outs, et cetera. I'd be interested also in to sort of get an idea if your temping line in VCSEL is actually when it could become cost competitive with using outsourcing. I have a follow-up. Thanks.
Yeah. Thanks, Rob, for the question. On the outsourcing, strategically, there is no change. We always said that only technologies which are highly differentiating, in other words, no one else can do it, we will do in-house. The rest will be outsourced. We continue this strategy. We actively are looking for additional sources where technologies which are maturing over time can be outsourced even faster. This is clearly the strategy, and the way going forward is, of course, we want to limit our capital expenditure to the minimum needed. The same applies for the VCSEL manufacturing building up in Singapore currently. We will start production end of the year and utilizing the established supply chain we have already in the course for the year. But as you know, we needed to invest to make the 3D launch for the whole market happening.
Without the investment we have done in the last two years, you wouldn't have seen this application on the market as you see today. This enabled the technologies, enabled the market, we just had to do.
Got it. Just on spectral sensing, is it still roughly a $2 content item when you think about getting into the smartphones, for example? Thanks.
Yeah, it's multiple dollar. Yeah. It's a highly complex technology, very differentiating. It's a multiple dollar device, yes.
Okay. Thank you.
The next question from the phone comes from Achal Sultania with Crédit Suisse. Your line is now open. Please go ahead, sir.
Hi. Good morning. Just a question on the mix. How should we think about the mix as we go into the back half of the year? Obviously, mix has been a specific issue that you've been raising for the last few quarters. Given that we are already in the start of the year and you already must have got some indications from customers around product launches that are expected in Q2, Q3, is mix expected to significantly improve, or should we expect volumes to be a bigger driver as we think about margins in the back half of the year? Then I've got a follow-up on VCSEL. Thanks.
Yeah. Hi, this is Michael. Yes, we expect a significant improvement of the mix. That's why we also said we expect a stronger second half than first half, as we have seen also historically. This is obviously also then driving margins.
Okay. Just on the VCSEL side of things, obviously you expect a ramp of mass production in end of this year, 2019. Clearly, that fab is going to take some time to ramp up because of the CMOS nature of products. Should we expect any short-term negative impact on margins as that fab starts to ramp up? Or is it going to be too small in the bigger scheme of things that we should not care about the ramp that much?
Yeah. It's definitely small. Compared to our better size of the company, we won't see much of an effect.
Okay. Thank you.
The next question comes from David O'Connor with Exane BNP Paribas. Please go ahead.
Good morning, gentlemen. Thanks for taking my questions. A question for Michael on cash and the balance sheet. What's the priority for you for capital allocation in 2019? On the one hand, you've suspended the dividends. Previously, in November, you announced the partial buyback of the convert. If you can give us some color around that would be great. I have a follow-up.
Yeah, sure. Clearly, as you have seen with the development of our cash at the end of the year, preserving cash is very important these days with the high net debt. Clearly, our intention for 2019 is to reduce our net debt and bring it more in line with our own expectations.
Is there a leverage target for exiting 2019 that you guys have set?
I can give you a number, but it should be significantly lower.
Okay. Maybe one follow-up for Alex on the automotive, medical, and kind of industrial bucket of the business. You talk about a more muted development there on automotive, which is not entirely surprising given what we've heard from peers. Can the Austrian fab remain fully utilized in 2019 in this kind of environment, or can you give us some color about how much of that business is outsourced in and around the Austrian fab? Thanks.
Yeah. Thanks for the question. Actually, this a little bit more muted demand actually helps. The factory in Austria was at the edge of capacity last year. This eased up the situation a bit. I have no concern at all that we have underutilization of fab in Austria, this will be fully loaded. We also do have the flexibility that certain products we can manufacture in-house and outsource. That means in case of any event that there would be spare capacity, we can insource again. This is very well managed, and I don't see any problem for this year.
Very helpful. Thank you.
The next question comes from Sébastien Sztabowicz, Kepler Cheuvreux. Please go ahead.
Yeah, hello. Thanks for taking my question. Could you please make an update on the charging project? When do you expect to have the first revenue contribution from this specific project? Also, on the Singapore fab, what was the utilization rate in the last quarter of 2018? Please.
To the first question, this charging project, it will ramp in the first half. We are very excited about this. It's an opportunity project, as you know. The ramp will happen the first half and continues for quite a while.
This is Michael. To your utilization question, we can't give specific numbers, obviously, it was low. We've seen some headwinds, and that's why the margin actually is where it is.
Okay, one last question, if I may, on the CapEx. You expect a significant reduction for 2019. Could you be a little bit more precise, helping us to model a little bit the free cash flow for this year?
Well, we don't give any specific numbers, as you know. If I say significantly lower, you can really expect that. Looking into Q4, you have already seen that it is significantly lower than Q4 2017, probably you can read something out of it.
Okay, thank you.
The next question, from the phone, comes from the line of Sandeep Deshpande with JP Morgan. Please go ahead, sir.
Yeah, hi. Can you talk a little bit about this world-facing 3D sensing, and what components you would supply to this market as well as any other kind of 3D sensing that where you will have revenues in probably the lower-end versions of 3D sensing where you might be supplying components? When both these will start substantially contributing to your revenues and if there are any wins in those? Thanks.
On world-facing, I mentioned it in the call right now. A lot is based on our various illumination competencies. You could expect this in a similar way for the world-facing architecture. We're quite excited about this because it's the first time this new application will come to market. As we have seen it from the front-facing, we expect that this will evolve to more customers over time. This is a quite exciting topic. We are very encouraged that we are, on the front-facing, also winning one after the other design win, which clearly shows the competencies and system knowledge we have and the broad portfolio, which includes system architecture, knowledge, and software. The ramp will happen, as I mentioned, in the first half. We are seeing a good traction on this business.
Thank you.
The next question comes from Michael Foeth with Vontobel. Please go ahead.
Yes. Hi, gentlemen. Three questions. You mentioned the utilization rate in Singapore in the fourth quarter. You cannot give a specific number, but can you tell us how you expect this to trend in 2019 according to your current budget?
Sort of be twice as loaded as in the fourth quarter. Any indication on that would be helpful. Second question, again, on the spectral sensing. I seem to remember that you talked about a small number ramp already late in the fourth quarter initially, and now it seems to be in the mid-year. Can you tell us what created that delay? Finally, just on your reporting, you seem to restate your past numbers systematically, I guess, due to changing FX rates. Effectively, you're reporting in euros and not in dollars. Could you give maybe a clear historic restatement every time you do that? That would be very helpful, just as a remark. Thank you.
Yeah, Alex, let me take your second question, and Michael address the first and third one. On the spectral sensing, as I mentioned, this is a very highly differentiated technology which includes software. For that reason, we're working commonly with the customer on the project, and for obvious reasons, there had been a certain delay. We are very confident that mid of the year, this will be launched. We experience this when new projects and new technology come into the market, this can happen.
Yes.
To your loading questions, this is Michael. Obviously, it's low. You can see with the revenue development, and we expect to improve over the course of the year. With having said that, the second half, we see an improved product mix, and we see a similar pattern of second half versus first half. We also see the loading to improve in the second half and therefore the margin situation. To your currency question, our functional currency obviously is euros, and we calculate then the US dollar we report. We use the last quarter's average FX rate for also historical numbers to really compare apples with apples here.
Yep. It would be helpful to have all the euro numbers as well, because it keeps on shifting everything. Thank you.
That is, euro numbers are obviously there. You find it in the report.
Okay. Thank you.
The next question comes from Jürgen Wagner with MainFirst. Please go ahead.
Yeah, good morning. You mentioned in your prepared remarks that you don't see one dominant 3D technology, as a follow-up question on the utilization question, assuming that time-of-flight or even active stereo vision would replace the structured light solution you have at the moment for Face ID, what would happen to your utilization of the Singapore hub? And the second question is, you had some traction with your behind OLED light sensor. How meaningful can that be or can that become over the next, let's say, two years? Thank you.
Two. Thank you for the question. Behind OLED is a meaningful business, and we see very strong traction after the announcement at the CES this year from multiple customers to engage with us to have behind OLED in their platform. Especially when you look at potential new phones with multiple displays, this adds a lot of volume to this business. Regarding 3D sensing technologies, as I mentioned, I do not see that one of the technology gets replaced. It's more coexistence of three technologies. We see it in the discussion with customers, everybody has a different focus, a different application, software requirements, and cost assumptions. We see this living along each other and not that one will replace the other.
Okay. Good. Thank you.
Thank you very much, ladies and gentlemen. This was the last question for this morning's question and answer session. We thank you very much for your interest this morning. We look forward to speaking to you again with our first quarter results. Thank you very much and goodbye.