Ladies and gentlemen, welcome to ams third quarter year 2018 results conference call. I'm Alice, the conference 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. Good morning. Welcome to the ams telephone conference for the third quarter of 2018. My name is Alice, your conference call operator. We would like to draw your attention to the fact that all participants are in listen-only mode during the presentation and that the conference is being recorded. After the presentation, you will have the opportunity to ask questions by pressing star and one at any time.
If you need the assistance of an operator, please press star and zero on your telephone. The conference may 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 happy to welcome you to this morning's conference call on the third quarter results. As usual, Alex will lead you through developments in our business, Michael will give you some more details on our financials. Alex, please.
Thank you, Moritz. Good morning, ladies and gentlemen. I'm very happy to welcome you to our third quarter 2018 conference call this morning. Let me first give you some key financial figures. Michael will later take you through the financials in detail. Our third quarter revenues came in at $480 million in the upper third of our guidance range and up 57% compared to the third quarter last year. Our adjusted EBIT, excluding acquisition-based and share-based compensation costs for the third quarter, was $60.2 million, or an EBIT margin of 13% of revenues, which was well in line with our previous guidance. Our business showed a strong performance in the third quarter, driven by the previously expected significant product ramps in our consumer business and positive growth contributions from our other end markets. Let me take a look at our consumer business first.
As a leader in optical sensing, we offer an unmatched portfolio covering high-performance solutions for 3D sensing, including VCSEL-based illumination, True Color, and other high-quality display management, spectral sensing, advanced proximity sensing, and other optical applications. Leveraging our extensive technology base, we are a key innovator in optical technologies and continue to advance high-performance optical sensing. We are a leading provider of 3D sensing technology, as shown by a large-scale ramp we are realizing this second half for a major global smartphone platform. We are ramping very high volumes of differentiated optical systems comprising complex optical manufacturing and high-performance wafer-level optics. As expected and consistently mentioned by us, the smartphone market has experienced multi-year development and integration cycles for 3D sensing, which are due to the complexity of the technology.
This has not changed what we are seeing across smartphone OEMs and ecosystem players, namely a clear focus on 3D sensing as they target broad usage of 3D technology for the coming years. We are in a strong position to support current and upcoming 3D sensing implementations across different technologies in 2018, 2019, and beyond, while 3D sensing momentum continues to increase. We see an ongoing coexistence of 3D sensing approaches, structured light, time-of-flight, and active stereo vision, and are successful in all three areas. Through our leading portfolio of 3D technologies, solutions, and system know-how, we address both face-related and world-facing applications and are engaged in numerous OEM projects and discussions at various stages. Here, I'm happy to add that we're involved in current design activities for world-facing 3D sensing application for a major smartphone OEM.
The announced Android 3D sensing design wins for Chinese smartphone vendor Xiaomi, where we cover VCSEL arrays, flood illumination, and proximity sensing, and a major Android OEM for an undisclosed scope have both moved to production. We are also excited about two design wins in Android time-of-flight 3D systems for two different Asian smartphone OEMs, which leverage our illumination and VCSEL expertise. Our active stereo vision developments with a major Android ecosystem player for reference solutions are progressing rapidly, and we see a high level of partner engagement here. We enable a high-quality implementation of active stereo vision, which will help bring 3D sensing to a wider range of Android devices. On this cooperation, we expect to provide further details in the current quarter.
Let me also say that based on advanced OEM discussions, we expect the active stereo vision solution built around ams technology to be in first smartphones next year. I'm excited about our position in the VCSEL space as we see significant design momentum for our differentiated VCSEL portfolio in different 3D systems. We are more and more successful given the competitive advantage of our high-power VCSEL technology and our 3D expertise. We therefore expect to build a strong market position in high-performance VCSELs for consumer 3D sensing with a range of customers. This is based on a broad market traction with multiple 3D programs, won or advanced discussions. Our success underlines the strength of our 3D illumination portfolio, including dot projection, different types of flood illumination, proximity sensing, and pattern projection.
These developments and wins across different 3D technologies and customers clearly confirm our view that VCSELs are the illumination technology of choice in 3D sensing, versus other technologies that have been discussed. Additionally, we have first computing OEMs engaging with us on 3D face recognition applications in the mobile computing space. All in all, it is exciting to see that extensive OEM and ecosystem player engagement and design activities across 3D technologies. These developments confirm the ongoing momentum in consumer 3D sensing adoption despite the emergence of different timelines in the market. We are also ramping True Color optical sensing solutions for display management in very high volumes through the second half of this year. Moreover, we have secured first design wins for behind-OLED display proximity and light sensing at a major Asian smartphone OEM. This is advanced new technology which moves the sensing behind the display and enables bezel-less phone designs.
We continue focused development efforts for new optical sensing applications, while first spectral sensing shipments are expected to start as previously indicated, and then contribute to our 2019 growth. Our audio sensing business continued to show a robust performance in the third quarter and offers an attractive growth outlook, while our other consumer product lines provided attractive contributions from high shipment rates. Let me now move to the other side of the business, where our industrial, medical, and automotive markets contributed positively to our overall development. Our industrial business showed a good performance based on ongoing solid demand in automation, harbor, industrial sensing, and industrial imaging. As a key provider of sensing solutions to leading industrial OEMs, we benefit from increasing sensor deployment in this area.
In industrial imaging, our industry-leading global shutter portfolio is gaining further high-value wins, like the first design win for our 50 megapixel high-performance sensor solution at a U.S. customer. As an innovation driver, we see our imaging business offering very attractive growth perspectives for the coming years. I am excited to add that we have gained an industrial VCSEL win with an online shopping leader for warehousing and distribution robotics. It is also a great example of how we are able to bring multiple products and technologies into a customer-driving broad engagement. Together with our previously announced automotive win, this success clearly shows how strong our technology and market access is, and how VCSEL will cover broad applications across end markets. Our medical business recorded another attractive quarter with good volumes from computed tomography, VCSEL digital X-ray, mammography, and miniature camera endoscopy.
We leverage imaging and optical technologies for high-quality diagnostics and innovation and see very good market traction in endoscopy, where our solutions enable new disposable products. Our automotive business continues to perform well and record healthy results in the quarter, while we see ongoing attractive demand for our solutions. As we pursue significant development efforts for the reported major program win in VCSEL illumination for solid-state LiDAR, industry interests in our automotive technologies continue to broaden, particularly in Asia and in Japan. This is driven by our differentiated portfolio and strong know-how in new and upcoming applications, such as 3D sensing and LiDAR. I am excited to see very positive feedback from our LiDAR space on our VCSEL driver IC solutions and optical path capabilities, where we offer outstanding optical performance in different LiDAR implementations. Additional industry players are therefore starting to engage with us in LiDAR and 3D sensing.
We see, for example, interesting momentum in Japan with first trials at major automotive players. At the same time, design activities for the first in-cabin 3D sensing project are progressing for a leading OEM. To support our range of production needs, we implemented additional manufacturing investments into our Singapore facilities in the quarter, which included equipment for our internal VCSEL production line. The construction of internal VCSEL capacity for consumer application is progressing to plan with production run schedules to start around middle of next year. Let me now update you on our strategic assessment. We have, on the one hand, evaluated a meaningful acquisition opportunity over the last month but have decided not to pursue this opportunity for a number of business reasons.
On the other hand, looking further ahead, we see that optical sensing technologies will support an even broader spectrum of applications with significant growth potential for ams. This will also include areas such as audio sensing. At the same time, we recognize that upcoming optical sensing opportunities offer a larger size revenue opportunity and higher growth prospects for us when compared to certain in-visit environmental sensing applications. We have therefore decided to de-emphasize current efforts in environmental sensing and focus strongly on very attractive mid- and long-term growth opportunities in optical technologies. This includes new areas of optical technology innovation in the non-classic optical space, such as photonic elements and photoacoustic structures. Photonic elements comprise different types of micro and nano structures, creating components in integrated devices that are able to manipulate light in new ways.
These structures enable innovative optical functionalities for sensing applications, which may span a range from manufacturing to environmental monitoring, healthcare, and lighting. The technologies involve cutting-edge use of lasers, optics, and electro-optical devices, such as new types of waveguides, lenses, and diffractive elements, for which we plan to leverage proprietary ams fab processes. We are now in the process of defining steps to implement the above-mentioned change and shift resources, and expect further details to be available with the next quarterly cycle. With these decisions, we have made ams even more focused in its strategic approach as we pursue our growth strategy around the three pillars, optical, imaging and audio sensing. We see a clear long-term technology trend towards optical sensing and optical technologies, where optical technologies will offer more attractive solutions for an increasing range of applications across different sensing markets.
Consequently, we are focusing ams on this trend now to create an early lead in this exciting space. We will therefore emphasize development efforts for next-generation optical technologies to drive innovation as the leader in optical sensing. Supporting this move, we are also in early preparation stages for the planned secondary listing at the Hong Kong Stock Exchange, which is currently expected for the second quarter 2019. Besides enabling full access to the broad region investor base, the envisage listing also underscores the growing relevance of the Asia-Pacific region for our business. To enhance the benefits of the transaction, we currently expect to include a share placement of up to 10% of outstanding shares in the listing transaction, subject to required approval. Let me now come to the outlook for our business.
For the fourth quarter of 2018, we see further sequential growth as we continue to ramp very high volume smartphone sensing products, while our other end markets continue their positive contribution. Based on available information, we expect fourth quarter revenues of $470 million-$610 million, growing around 23% at the midpoint sequentially. We expect 2018 to be another strong growth year for ams, with record revenues and a top-line growth of up to 44%. The adjusted operating margin for the fourth quarter, excluding acquisition-based and share-based compensation cost, is expected to increase further sequentially to 16%-20%. Taking into account product mix effects as overall demand skews to a mix including certain higher maturity products. At the same time, we expect total capital expenditures for 2018 of around $500 million.
We anticipate strong cash generation in the fourth quarter and expect a meaningful positive free cash flow result for the total second half of 2018. We reiterate our revenue growth target of 60% CAGR for the 2016 to 2019 period, based on our business outlook and pipeline for the coming year, which translates into further substantial expected growth for 2019. We remain committed to driving profitability growth and endorse our target of 30% adjusted EBIT margin in 2020, as we are convinced of the long-term strength of our business and our strategic positioning in multiple growth markets. Following extensive investments in 2017 and 2018 and supporting our cash profile, we currently expect capital expenditure for 2019 to decrease significantly from this year's level and reach our long-term target range of 10%-15% of revenues.
Let me add that while we do not guide out further than the fourth quarter, we see early indications pointing to revenue seasonality for the first quarter versus fourth quarter being better. That is less pronounced than what we saw in the first quarter 2018. Given very good growth in our Android optical sensing business, this could support a first quarter on a similar or better level than the third quarter we just reported. Given the broader business growth we expected for next year, we currently believe that the seasonality within next year's first half will not repeat a pattern like this year, but offer an overall better picture. With this, let me hand over to Michael for details on the financials.
Thank you, Alex. Good morning, ladies and gentlemen. My pleasure to give an overview of our IFRS and adjusted consolidated numbers for the third quarter 2018. As usual, let me start with our P&L and top-line development. Alex already mentioned that our third quarter group revenues were $479.6 million, which was in the upper third of our previous guidance. We recorded a very healthy 57% year-on-year growth, while we saw an exceptional strong increase of 92% compared to the previous quarter. Our adjusted gross margin, excluding acquisition-related and share-based compensation costs, was 33% compared to 41% in Q3 last year. This gross margin development reflects our product mix and the ramp-up nature of the quarter, as we realize increasing run rates for high-volume optical products. Our IFRS reported gross margin was 31% compared to 37% in Q3 last year.
Our R&D spending was $68.1 million for the third quarter 2018, an increase from $63.6 million in Q3 last year. Despite a certain absolute increase, this means 14% of revenues in relative terms, which is significantly below last year's Q3 level of 21% of revenues. While there are always quarter-to-quarter movements in R&D spending, we expect a somewhat higher level of spending for Q4 in absolute terms, given our focus on R&D to drive innovation and focus on new product developments going into 2019. We expect continued meaningful levels of R&D spending going forward, which include a range of platform developments and large product opportunities we are working on. The movement towards our long-term target for R&D spending, which is to stay well below 15% of revenues, helped by business growth we target for the coming years.
Further down our P&L, SG&A costs were $42.7 million compared to $40 million in the third quarter last year. In relative terms, we spent 9% of the revenues on SG&A in the quarter, which is very likely below the level in last year's Q3 of 13% of revenues. Here, we expect a roughly similar level of spending in absolute terms for the fourth quarter. Looking forward, we see ourselves on a way towards our long-term target for SG&A costs of well below 10% of revenues on a full year basis. Our other operating income of $2.2 million for the third quarter compared to $3.2 million in Q3 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 results or EBIT, excluding acquisition-related and share-based compensation costs for the third quarter, was $60.2 million or 13% of revenues, which was well in line with our previous guidance. This Q3 result also increased, as expected in absolute terms, from $40.5 million or 13% of revenues in Q3 last year. The IFRS reported results from operations or EBIT for the third quarter was $37.3 million or 8% of revenues, up from $12.3 million in the same period in 2017. Our net financial result was strongly positive at plus $34.8 million, showing again a very significant influence from changes in the valuation of the option element of our foreign currency convertible bond, which we recorded as required by IFRS rules. This figure compares to $6.1 million in Q3 last year.
The financial result also reflects non-cash valuation adjustments for foreign currency balance sheet items and, of course, interest expenses. The adjusted net results for the third quarter came in at $18.6 million compared to $23.5 million in the same period last year. This was mainly driven by higher interest expenses, while the mentioned change in valuation of the option element of the convertible bond is excluded in the adjusted net results. Adjusted basic and diluted earnings per share were CHF 0.22 and CHF 0.21, compared to CHF 0.28 and CHF 0.27 in Q3 2017, or $0.23, $0.22 compared to $0.28 to $0.27 for the third quarter 2017. Our backlog on September 30th, 2018, stood at $602 million, up from $544 million we showed at the end of the second quarter 2018 and well above the $512 million on 30th September 2017.
I'd like to 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 $378 million at the end of the quarter, compared to $244 million at the end of the second quarter. This results from the utilization of certain committed lines to finance remaining CapEx needs and boost flexibility as well as healthy operating cash flow. Our trade receivables stood at $345 million, up from $290 million at the end of the second quarter, given the growth of our business. Our DSO ratio was 69 days, down from 80 days in the last quarter, but up from 48 days in Q3 last year. Here we are already seeing a solid decrease in DSO on a substantial basis, which we expect to improve further going forward.
Inventories were $341 million compared to $333 million at the end of the second quarter. Given major ramp-up activities we are currently implementing, this development mainly resulted from changes in work-in-progress levels in our manufacturing, while the finished goods portion of our inventory remained at roughly 25%. On the liability side, we have a current debt position of $247.3 million, while our long-term debt stood at $1,738 million at the end of September. Our net debt position was $1,606 million at the end of Q3, reflecting the convertible bond issues last year and this year. Our long-term debt was generally taken on to both the liquidity support CapEx and past acquisitions and create flexibility. Apart from the issued convertible bonds, the debt mainly consists of unsecured bank loans of a long-term nature. The maturity range on the debt is mostly centered around the 2022 and 2023 timeframe.
I've learned about some unfounded speculation, I would like to clarify that we have not had any requirements for repayments on our debt over the course of this year. Our operating cash flow in the third quarter showed a very healthy increase to almost $86 million from -$37.6 million in the same quarter last year. This positive development was mainly driven by our strong positive result, as well as changes in trade and other payables. We expect strong cash generation in the fourth quarter, which will also drive a very meaningful positive free cash flow for Q4 and the full second half of 2018. As a result, we see our net debt to EBITDA ratio already improving by year-end from the current level.
Looking at our operations, we are successfully realizing the current high-volume production ramps in 3D optical and other sensing, as shown by the strong revenue growth in the quarter. Production yields for certain customer products are ahead of expectations due to stronger efficiency improvements, while significant advances in the filter deposition process for optical sensing products have substantially reduced processing times. This is driving a lower utilization of our expanded optical manufacturing and filter deposition capacity despite the ongoing ramp activities. Following further analysis, we have decided to retain these existing production capacities to support our future growth plans. In relation to our production, we recorded further CapEx investments in the third quarter of $106 million. This spending was well below last year's level of $168 million in Q3. This CapEx comprised planned investments, including further investments for our internal VCSEL production line in Singapore.
As mentioned by Alex, we expect 2018 CapEx now to be lower than before and reach around $500 million for full year 2018. For next year, we currently expect CapEx to decrease significantly from this year's level following extensive investments in 2017 and 2018, to reach our longer-term target range of 10%-15% of revenues. With that, I would like to open the floor for questions. Thank you 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 entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands-up to asking a question. Anyone who had a question may press star and one at this time. The first question comes from the line of Andrew Gardiner from Barclays. Please go ahead.
Good morning, Alex. Good morning, Michael. Thanks for taking the question. I was just interested in trying to focus in on 2018 to start with. If we go back to earlier this year, you guys called for a very strong sequential half-on-half growth in 2H18 versus 1H18. In February, you were suggesting it could be on the order of 80%-90% half-on-half growth. Since then, the second quarter was obviously weaker. We understand the product transition at Apple, and that set an easier first-half base for you. Yet now with the Q3 results and the full Q guidance you've given, we are somewhere in the high 50% range, half-on-half. Still healthy, but clearly less than what you were anticipating earlier in the year.
I know the end market may be a little bit slower, Android adoption may be a little bit slower, but those weren't really included as major assumptions in your guidance. It was always more about adoption and content and price. We're clearly seeing adoption up with your lead customer and content up. Can you just help us sort of bridge the gap between what has changed. I think the easy conclusion here is that you faced more price and margin pressure than anticipated. What else is moving around that could be leading to these lower expectations? Thank you.
Yeah. Hi, Andrew. Good morning. It's Michael. Well, clearly as mentioned by Alex, it's related to the product mix and what we currently see is what it is. We're excited about the broad adoption we see to our products, but the product mix within the portfolio makes a difference.
What about the mix has changed since the beginning of the year that would lead to such a significant difference in revenue and profit?
Well, obviously we cannot, as you know, we cannot discuss certain customers and details within these customers. As I said, it's clearly the product mix.
Okay. All right. Perhaps just another one then. On the point you were making towards the end there, Michael, about the utilization on some of the lines and filter deposition also improving. You got more sort of excess capacity or underutilization than you thought. Can you explain the future revenue drivers that are going to get that utilization up and therefore lead to a more attractive margin over time? Is it development in the Android ecosystem for wafer level optics in 3D sensing, or is it optical packaging more broadly? Just understanding how that's going to ramp would be helpful. Thank you.
Yeah, Alex. Yeah. It's a combination basically of all what you have said. Of course, to have a broader adoption with our optical packages manufacturing in Singapore for a broader customer base and certainly a strong driver for that. We see in the Android business, we are just winning basically on a monthly basis. The combination of both will drive utilization up and that's also the reason why we have decided to keep tools which are underutilized today for our future growth. For that reason, we expect also significantly lower CapEx spend for our 2019.
Okay. Thank you.
The next question comes from the line of Achal Sultania from Credit Suisse. Please go ahead.
Hi. Good morning, Alex. Good morning, Michael. Just a follow-up on the previous question. Just when we look at the margin guidance for Q4, it seems your revenues are still growing year-on-year, almost about 10%, but your EBIT is down a lot versus last year. Are you saying that all of that is just a mix issue within one particular customer? Or are there other moving parts beyond that as well?
Yeah. Good morning. Hi, this is Michael. As I said previously, it's a product mix effect across several large revenue streams in consumer and in 3D display management, audio, et cetera. Also across customers, obviously, and this is influencing the margin. As you know, we cannot comment on specific products or customers, and we're not guiding for gross margin specifically. We can definitely assume to see an improvement going forward from the third quarter.
When we talk about improvement, let's say, going into 2019, do you expect mix to improve? You expect that because there will be more growth coming from more customers that the mix improves overall? You think that the mix within that one particular customer actually improves a lot next year?
Yeah. Clearly, again, it has to do with the product mix. As Alex mentioned, we see ramp-ups next year for Android customers and we also see with these programs and revenue streams improved margin profile.
Okay. Thanks, Michael.
Thank you.
The next question comes from the line of Sandeep Deshpande, JPMorgan. Please go ahead.
Thank you for letting me on. I have two or three small questions. Firstly, my question is on the world-facing sensor. You've announced a world-facing win. What are you going to be supplying in a world-facing 3D sensor? Secondly, in terms of your strategic changes that you're making, with the strategic changes that you're making, will it result in a reduction in your operating expenses because one of the pillars is being removed? Thirdly, regarding again, back again to the question of your operating margin. You have given this 30% margin guidance in 2020. Why are you not taking away this guidance at this point, given that the guidance into Q4, and of course 2018 has disappointed significantly because it has only potential to inflate expectations into 2019? Thank you.
To your question on world-facing, we are in, as I mentioned, in progress for active project. It's not a win yet, but we are very close in getting there. That's the first world-facing activities we have as a company with a leading company as customer. The contents we can't disclose, but it's similar to front-facing that for every project we look what makes sense for us as a company, which projects and part of the complete solution we want to provide. On the strategic changes, the key driver for this change was the understanding that the optical competencies where we are clearly leading as a company is very relevant for obvious reasons, for optical, for imaging, but also for audio sensing. That's why we made this change, to de-emphasize our environmental business because we didn't see the growth we have seen before.
The rationale for that was not to reduce OpEx significantly. It was to utilize resources, competencies, and investments into the optical space to accelerate the growth there for the next years to come. We intend to keep our OpEx on a very reasonable level, but to move predominantly resources from this business line and business segment into the optical space. Let me take your question on the margin target. Clearly, we continue to see the potential for a strong improvement over time. We have areas within the company where we already significantly above this target even. This is a push, certainly, but we expect to get there and why should we take it away then?
Okay, thank you.
The next question comes from the line of David Mulholland from UBS. Please go ahead.
Hi. Just one short-term question on the gross margin again, but I'm struggling to follow in terms of how you ended up with higher yields, which should have been a positive for gross margins. I can understand there ending up being some underutilization, but can you walk us through how that doesn't end up netting out at the same place, and how you've ended up with a net impact from that, if possible? Then I've got a couple more questions.
David, good morning. It's Michael. Yes, as I said, it's product mix related. We see a strong improvement in our yields, which takes away some risk, which also will help us going forward, to have lower CapEx. We mentioned that before, that we expect to be already within our long-term guidance of 10%-15% of revenue. If you can remember, about a quarter or two quarters ago, I mentioned that we hope to get close to that range. We believe we get into that range, clearly lower CapEx going forward. The utilization topics have also a smaller influence going forward. On the other hand, I mentioned it also in my words, we have a strong technology development team, therefore also because of less time we need, processing time, a more significant underutilization.
It's a mix of effects which led to what we currently see.
That's great. Just looking forward to next year in 2019, two questions on that. Given what you've done in terms of the capacity spend, the CapEx investment you've already made in the last 18 months, what do you already have in, if you can quantify it at all, in terms of revenue capacity within your manufacturing facilities today? As we look towards your revenue target for 2019, the $2.7 billion, if I calculated it right, how much of that do you think is actually underpinned based on what you've already won from the contracts that you've been talking about?
Yeah. Again, Michael, I think the CapEx spending supports clearly the target for next year. That's what we are targeting, therefore we stick to it.
You've already spent enough for that? As in you've already spent enough to have capacity for the 2019 target?
Yes.
Okay.
The 2019 piece, the 2019 piece obviously will also support years beyond. Alex, in 2019 is of course, as we mentioned, significantly lower than 2017 and 2018. Of course, we continue to invest in our wafer fab for VCSEL manufacturing. There will be add-on investments, but significantly lower. All the investments we have done so far with minor adjustments supports the growth we indicated for 2019, mainly driven by all the high volume products related to 3D sensing, display management, and also audio. Of course, we mentioned today a lot of Android design wins. Obviously we have more in the pipeline, which are all related to time-of-flight, so it's active stereo vision. We see a strong momentum in display management, especially behind OLEDs.
The perception in the market is very strong, you will see that this kind of technology will go to multiple customers because it's a very differentiated technology. Spectral sensing, I mentioned already. Of course, charging project, the power project we have indicated some quarters ago, drives really a strong growth for us in the future. Of course, continuous growth in the audio business as well as medical, automotive, and industrial business.
That's great. Just one final question on the balance sheet. Obviously, Michael, you mentioned using some more of the outstanding debt facilities you already had. Can you just comment on how much more capacity you have from the committed lines that you have, if you needed to increase your debt further? Just can you clarify, because you mentioned obviously the interest expense on that is fairly low and the timeline is quite long, are there any covenants on the debt that you have outstanding?
Yeah. We still have ample lines available if needed, we currently see no need to pull further lines. We have a strong cash flow generation. We had already in Q3. We expect even substantially stronger in Q4. I think that the level of debt peaked, and we take it from there and will improve going forward.
The covenants?
I don't want to comment on specific covenants, but there is nothing which worries me.
Good. Thanks very much.
The next question comes from the line of David O'Connor at BNP Paribas. Please go ahead.
Good morning. Thanks for taking my question. A couple from my side, I would say. Maybe firstly from Michael, going back to this underutilization, firstly, will that extend into the seasonally weaker first half in 2019? Can you actually give us a utilization number for what you expect in that transition from Q3 to Q4? The follow-up. Thanks.
It's Michael. Good morning. I cannot give any specific utilization number. We have those different lines. I mentioned the filter line, which is probably currently the line which is underutilized to the largest extent because of the rapid R&D development. We have seen the rapid progress in our development, which will drive significantly reduced time on filter deposition. As I said, we see improvement there. Clearly, it usually depends on the demand pattern of our customers. As Alex said also, we clearly see that the revenue seasonality for the first quarter versus the fourth quarter this year is being better, less pronounced than we saw in the first quarter of 2018. We also expect to continue this into the second quarter.
Understood. Maybe a follow-up then, one for Alex on the pricing pressure you're seeing for these older than optical products. Was that higher than you expected? If I remember back to the start of the year, you initially started speaking about ASP increase, it seems you kind of surprised slightly by the strength of that pricing pressure. Just give us a sense of how we should model the ASP trend for these kind of older products going forward. Thanks.
Yeah. I don't see a big difference to what we're seeing regarding pricing pressure. The mix is to more skewed, mature products. On the midterm, we see that more and more new generations come up as we indicated multiple times in our quarterly sessions. This new technology coming up will bring the ASP up further. It always happen in the market that one of the other platform uses similar technologies for multiple generations.
That's helpful. Thank you.
The next question comes from the line of Robert Sanders, Deutsche Bank. Please go ahead.
Yeah. Good morning, guys. First question is just on your VCSEL business. When you think about that business in smartphones, do you see that displacing sockets occupied by existing players, or is it mainly about winning new sockets? I have a follow-up. Thanks.
When you look at the design wins we just announced, these are all new business, actually with our portfolio, we're creating new applications together with our customers. That means we are winning new sockets. That's the focus of the company, to win more sockets and new sockets.
Got it. Just my follow-up would just be on the AMI business. There's been obviously a lot of chatter around slowdown in automotive, robotics sales, exports down for the last three months in Japan. Have you seen any impact from your large customers like Conti and ABB in that business as you look into Q4 and into the first half of next year? Thank you.
No, we don't see any change of our customer demand and forecasting, we don't see this. The business we are creating right now, especially the new 3D sensing opportunities and LiDAR, this, as you know, it's more for the next years to come.
Okay. Thank you.
The next question comes from the line of Michael Foeth from Vontobel. Please go ahead.
Yes, good morning. Two questions. One is regarding your fourth quarter revenue guidance. Maybe you can help us, the incremental revenues in Q4 versus Q3, how much of that is related to new products which did not materially impact the third quarter? Any indication there would be helpful. The second question is why are you planning a placement or capital increase in Hong Kong when actually your CapEx requirements are lower than previously expected and you expect your cash flow to improve significantly going forward? Why is that needed? Thank you.
Thanks for the question. For the fourth quarter, I would say the minority is new products and new business ramping up. The majority is still business we had for a while. Certainly we see for the first quarter, as we indicated, a lot of new, especially Android business will pick up. That's why we give quite a positive outlook also for the first quarter again.
On your second question, we see very clearly that there is significant interest coming out of Asia into ams, and that we have the ability to access a significantly wider range of investors and pools of investors than we currently can. In that context, we want to optimize the effect from the secondary listing. Okay. Thank you.
The next question comes from Janardan Menon, Liberum. Please go ahead.
Hi. Good morning. Thanks for taking my question. I just want to confirm that you said that the major smartphone OEM, the world-facing 3D sensing application, that is still not yet won. That is just a design activity that you are doing for them, and which has not yet been secured. I just want to confirm that you can still achieve your 60% revenue growth between 2016 and 2019 if you do not win that particular socket.
Yes, absolutely. I gave in the question before all the details why we believe so. We also indicated last quarter that our guidance for 2019 or for the next three years of the 6% growth did not include world-facing design wins. We also were very clear on that one. We see a lot of progress going on there, and we are very excited and proud to be in the leading position there.
If I look at your next year's sort of revenue profile, you have said that you could do around your Q3 or higher revenue, which is, let us say, about $480 million. If I sort of model that through, you would still need a very large jump into your Q3 and Q4 with revenues potentially going towards $700 million-$800 million in those quarters to achieve the 60% growth. I see, I mean, I heard what you said, which is you have a number of activities which is ramping up, but that sort of a jump would suggest that you need one or two really big wins to drive that. Do you have something of that nature already for the second half of next year?
Is it that you're seeing multiple wins, which will drive that kind of sequential increase into the second half of next year versus the first half?
Yes, it's both. We have multiple wins, I mentioned many of them already. We do see this growth as you have just described. Absolutely.
Okay. Last small follow-up from me. Which are the environmental sensors that you're dropping?
Well, environmental sensors is gas sensing, temperature, relative humidity, and pressure.
All of them are being de-emphasized?
Yeah. It's de-emphasized. We still have the capability in the company. We see opportunities there, but related to investment and related to focus for the company, it's clearly de-emphasized, yes.
All right. Thank you very much.
Yeah.
The last question for today comes from Veysel Taze from ODDO. Please go ahead.
Yes. Hi, good morning. Thank you for taking my question. Most of them have been already addressed, but few left on the utilization topic you mentioned. Could you say what is the drag on the margin, so the underutilization, I mean, is it 200 basis points, 300 basis points? Any indication there on how that could progress into 2019 and 2020?
No, I cannot give any details there. It's mostly related to the product mix and the technology development of some of the products.
Okay. Then on your CAGR 60%, just as a add-on to the previous question, so to say. You need to grow for 2019, 60% plus, so to say, at this stage. We know what is happening at your large customer, so you are not assuming here this rear-facing part. Which would imply basically your Android business needs to go up very heavily at this stage. I'm not sure, did you announce something new in Q4, apart from the two you had previously? Can you just update on the Android opportunity there, given all of the discussions in the market that some people might delay as they are looking for behind-OLED solutions for authentication, et cetera?
Well, as I mentioned before, the business we have and the outlook we have from all our customers, including design wins we just communicated, and obviously some others in the pipeline supports the growth for next year. Absolutely.
For Q4, let's say, or with Q3 earnings, you were still with the two design wins in the Android platform, right? You did not announce something new.
We just announced a number of new design wins compared to last quarter earnings release. We just did today.
Related to the 3D sensors?
Yes. We mentioned, for example, two design wins in time-of-flight as an example.
Okay. Can you say on the environmental business how big this business is currently, a rough indication, in terms of sales you have?
It's a smaller portion of the business, we don't release the exact numbers.
Okay. You want to sell this business, right?
What we have communicated is that we will de-emphasize the business. The path forward, we will most likely communicate in the quarter from now, as we described today. The decision today is to de-emphasize the business. Most importantly, resources are moving from this business to the more promising optical area we are addressing.
Okay. Thank you very much.
Thank you very much for your question. This concludes our question and answer session for today. We thank you very much for joining us this morning and look forward to speaking to you soon again. Thank you very much. Bye-bye.
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