Earnings Call: Q3 2018

Oct 23, 2018

Ladies and gentlemen, welcome to AUM's Third Quarter Year 2018 Results Conference Call. I'm Alice, the clerical operator. I would like to remind you that all participants will be in listen only mode. Any conference is being recorded. The presentation will be followed by Q and A session. At this time, it's my pleasure to hand over to Mr. Alexander Eberke, CEO Mr. Michel Basler Margowitz, CFO and Mr. Moritz Maina, Head of Investor Relations. Please go ahead, gentlemen. Good morning, ladies and gentlemen. This is Moritz Mainer. I'm happy to welcome you to this morning's conference call on the Q3 results. As usual, Alex will lead you through developments in our business, and 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 Q3 2018 conference call this morning. Let me first give you some key financial figures. Mike will later take you through the financials in detail. Our 3rd quarter revenues came in at $480,000,000 in the upper third of our guidance range and up 57% compared to the Q3 last year. Our adjusted EBIT, excluding acquisition based and share based compensation costs for the Q3 was $60,200,000 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 3rd 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 the lead line optical sensing, we offer an unmatched portfolio covering high performance solutions for our 3 d sensing, including VCSEL based illumination, TrueColor and other high quality digital 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 leading provider of 3 d sensing technology, as shown by a large scale ramp we are realizing in the second half of 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 3 d sensing, which are due to the complexity of the technology. However, this has not changed that we are seeing across smartphone OEMs and ecosystem players, namely a clear focus on 3 d sensing as they target broad usage of 3 d technology for the coming year. We are in a strong position to support current and upcoming 3 d sensing implementations across different technologies in 2018, 2019 and beyond, while 3 d sensing momentum continues to increase. We see an ongoing pre existence of three d sensing approaches, structured light, time of flight and active stereo vision, and are successful in all three areas. Through our leading portfolio of 3 d technologies, solutions and system know how, we address both phase 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 3 d sensing application for major smartphone OEM. We announced Android 3 d sensing design wins for Chinese smartphone, WENDAX 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 2 design wins in Android Time of Flight 3 d systems for 2 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 you see a high level of partner engagement here. We enabled a high quality implementation of active stereo vision, which will help bringing 3 d 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 inferred 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 3 d systems. We are more and more successful given the competitive advantage of our high power VCSEL technology and our 3 d expertise. We therefore expect to build a strong market position in high performance VCSEL for consumer 3 d sensing with a range of customers. This is based on our broad market traction with multiple 3 d programs, one or in advanced discussion. Our success underlines the strength of our 3 d illumination portfolio, including dock projection, different types of flood illumination, proximity sensing and pattern projection. These developments and wins across different 3 d technologies and customers clearly confirm our view that VCSELs are the illumination technology of choice in 3 d sensing versus other technologies that have been discussed. Additionally, we have 1st computing OEMs engaging with us on 3 d face recognition applications in the mobile computing space. All in all, it's exciting to see that extensive OEM and ecosystem player engagements and design activities across 3 d technologies. These developments confirm the ongoing momentum in consumer 3 d sensing adoption despite the emergence of different timelines in the market. We are also rendering 2 color optical sensing solutions for display management in very high volume through the second half of this year. Moreover, we have secured 1st design wins for behind OLED display proximity and light sensing at the major Asian smartphone OEM. This has 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 continue contributes to our 2019 growth. Our audio sensing business continued to show a robust performance in the Q3 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 megabit high performance sensor solution at the U. S. Customer. As an innovation driver, we see our imaging business offering very attractive growth perspectives for the coming years. I'm excited to add that we have gained an industrial rig sizzling with an online shopping leader for warehousing and distribution robotics. It is also 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 computer technology, fixed 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 programmable and 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 3 d sensing and LiDAR. I'm 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 3 d sensing. We see, for example, interesting momentum in Japan with first trials at major automotive players. At the same time, design activities for the 1st e cabin three d sensing project are progressing for a leading OEM. To support our range of production needs, we implemented additional manufacturing vessels into our Singapore facilities in the quarter, which included equipment for our internal vessel production line. The construction of internal vessel capacity for consumer application is progressing to plan with production ramp scheduled 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 of AT and T over the last month, but have decided not to pursue this opportunity for a number of business reasons. On the other hand and 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 auto 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 envisaged environmental sensing applications. We have therefore decided to deemphasize 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 nanostructures, creating components in integrated devices that are able to manipulate life 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 defective elements for which we plan to leverage proprietary AMOS 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 quarter results. With these decisions, we have made AMS even more focused in a strategic approach as to pursue our growth strategy around the 3 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 LMS 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 Q2 2019. Besides enabling full access to the broad region investor base, the envisaged 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 Q4 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 4th quarter revenues of $470,000,000 to $610,000,000 growing around 23% at the midpoint sequentially. Consequently, we expect 2018 to be another strong growth year for AMS with record revenues and the top line growth of up to 44%. The adjusted operating margin for the 4th quarter, excluding acquisition based and share based compensation costs, is expected to increase further sequentially to 16% to 20%, taking into account product mix effects as overall demand excludes to a mix including certain higher majority products. At the same time, we expect total capital expenditures for 2018 of around $500,000,000 anticipate strong cash generation in the Q4 and expect a meaningful positive free cash flow result for the total second half of twenty eighteen. 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 2018 and supporting our cash profile, we currently expect capital expansion for 2019 to decrease significantly from this year's level and reach our long term target range of 10% to 15% of revenues. Let me add that while we do not guide further than the 4th quarter, we see early indications pointing to revenue seasonality for the Q1 versus Q4 being better, that is less pronounced than what we saw in the Q1 2018. Given very good growth in our Android optical sensing business, this could support our Q1 on a similar or better level than the Q3 we just reported. Moreover, 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's, 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 you an overview of our IFRS and adjusted consolidated numbers for the Q3 of 2018. As usual, let me start with our P and L and top line development. Alex already mentioned that our Q3 group revenues were $479,600,000 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 and D spending was $68,100,000 in the Q3 of 2018, an increase from $63,600,000 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 and D spending, we expect a somewhat higher level of spending for Q4 in absolute terms, given our focus on R and D to drive innovation and focus on new product developments going into 2019. We expect continued meaningful levels of R and D spending going forward, which include a range of platform developments and large product opportunities we are working on. The moving towards our long term target for R and 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 and L SG and A costs were $42,700,000 compared to $40,000,000 in the Q1 last year. In relative terms, we spent 9% of the revenues on SG and A in the quarter, which is very likely below the last the level in last year's Q3 with 13% of revenues. Here, we expect a roughly similar level of spending in absolute terms for the Q4. Looking forward, we see ourselves going to be towards our long term target for SG and A costs of well below 10% of revenues on a full year basis. Our other operating income of $2,200,000 for the Q1 compared to $3,200,000 in Q3 last year resulted for the most part from R and D support grounds from Austrian and European R and D programs, which are tied to dedicated R and D spending for these programs. Given these developments, our adjusted operating results or EBIT, excluding acquisition related and share based compensation costs for the Q3, was $60,200,000 or 13% of revenues, which was well in line with our previous guidance. This Q3 result also increased, as expected, in absolute terms from $40,500,000 or 13% of revenues in Q3 last year. The IFRS reported results from operations or EBIT for the 3rd quarter was $7,300,000 or 8 percent of revenues, up from $12,300,000 in the same period 2017. Our net financial results were strongly positive at +30 $4,800,000 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 $6,100,000 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 Q3 came in at $18,600,000 compared to $23,500,000 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 result. Adjusted basic and diluted earnings per share were CHF 0.22 and CHF 0.21 compared to CHF dollars 0.28 to0.27 in Q3 20 17 or US0.23 dollars 0.22 dollars compared to US0.28 dollars $0.28 to $0.27 for the Q3 2017. Our backlog on September 30, 2018, stood at $602,000,000 up from $544,000,000 we showed at the end of the Q2 2018 and well above the $512,000,000 on 30 September 2017. Now I would 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 $378,000,000 at the end of the quarter compared to $244,000,000 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 $345,000,000 up from $219,000,000 at the end of the second quarter given the growth of our business. However, 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're already seeing a solid decrease in DSO on a substantial basis, which we expect to improve further going forward. Inventories were $341,000,000 compared to $333,000,000 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 $247,300,000 while our long term debt stood at $1738,000,000 at the end of September. Our net debt position was $1606,000,000 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 solidify, 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 2023 time frame. As 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 3rd quarter showed a very healthy increase to almost $86,000,000 from minus $37,600,000 in the same quarter last year. This positive development was mainly driven by our strong positive results as well as changes in trade and other payables. We expect strong cash generation in the 4th quarter, which will also drive a very meaningful positive free cash flow for Q4 and the full second half of 2018. As a result, you see our net debt to EBITDA ratio already improving at year end from the current level. Looking at our operations, we are successfully realizing the current high volume production ramps in 3 d 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 has 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 $106,000,000 However, this spending was well below last year's level of $168,000,000 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 $500,000,000 for full year 2018. For next year, we currently expect CapEx to decrease significantly from this year's level following extensive investments in 2017 2018 and to reach our longer term target range of 10% to 15% of revenues. And 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. The first question comes from the line of Andrew Gardiner from Barclays. Please go ahead. 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 2H 2018 versus 1H 2018. In February, you were suggesting it could be on the order of 80% to 90% half on half growth. Since then, the Q2 was obviously weaker. Now we now understand the product transition at Apple, and that's set an easier first half base for you. And yet now with the 3Q results and the 4Q 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. Now 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. So and we're clearly can you So can you just help us sort of bridge the gap between what has changed? And I think the easy conclusion here is that you face more price and margin pressure than anticipated. But what else is moving around that could be leading to these lower expectations? Thank you. Yes. Hi, Lou. 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. So we're excited about the broad adoption we see to our products, but the current mix within the portfolio makes the difference. But 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. But as I said, it's clearly a product mix. Okay. All right. Perhaps just another one then. On the point you were making towards the end, Michael, about the utilization on some of the lines and filter deposition also improving. So you've got more 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 3 d sensing? Or is it optical packaging more broadly? Just understanding how that's going to ramp would be helpful. Thank you. Yes, Alex. Yes. So it's a combination basically of all what you have said, of course, to have a broader adoption with our optical packages 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. So the combination of both will drive neutralization up, and that's also the reason why we have decided to keep tools which are underutilized today for our future growth. And for that reason, we expect also significantly lower CapEx spend for 2019. Okay. Thank you. Your next question comes from the line of Achal Sosania from Credit Suisse. Please go ahead. Hi, good morning, Alex. Good morning, Michael. Just a follow-up on the previous question. So just when we look at the margin guidance for Q4, it seems your revenues are still growing year on year, almost about 10 percent, but your EBIT is down a lot versus last year. So 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? Yes. Good morning, this is Michael. As I said previously, it's a product mix effect across several large revenue streams in consumer and 3 d display management, audio, etcetera. And this is and 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, but we can definitely assume to see an improvement going forward from the Q3. And so when we talk about improvement, let's say, going into 2019, like do you expect mix to improve or you expect that because there will be more growth coming from more customers that the mix improves overall? Or you think that the mix within that one particular customer actually improves a lot next year? Yes. I mean clearly, again, it has to do with the product mix. And as Alex mentioned, we see ramp ups next year in for Android customers. And we also see with these programs and revenue streams improve the margin profile. Your next question comes from the line of Sandeep Deshpande, JPMorgan. Please go ahead. My questions are I have 2 or 3 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 3 d 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? And 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? So to your question on world phasing, facing, we are, 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 1st world facing activities we have as a company with a leading company customer. The content, 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, I mean, the key driver for this change was the understanding that the optical competencies where we are clearly leaning as a company is very relevant for optical, for imaging, but also for audio sensing. And that's why we made this change to deemphasize 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 tend 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. So 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. And I can understand there ending up being some underutilization, but kind of 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 kind of net impact from that, if possible? And then I've got a couple more questions. Yes. David, good morning. It's Michael. Yes, I mean, as I said, we it's broadly accelerated. We see a strong improvement in our yields, which takes away some risk, which also will help us going forward to have lower CapEx. And we mentioned that before that we expect to be already within our long term guidance of 10% to 15% of revenue. If you can remember, about a quarter or 2 quarters ago, I mentioned that we hope to get close to that range. Now we believe we get into that range, so clearly lower CapEx going forward. And the utilization topics have also a smaller influence going forward. On the other hand, as I mentioned it also in my words. We have a strong technology development scene. And therefore, also because of less time we need processing time, a more significant underutilization. So it's a mix of effects which led to what we see what we currently see. That's great. And then just looking forward to next year in 2019, questions on that. Given what you've done in terms of the capacity spend, so the CapEx investment you've already made in the last kind of 18 months, What do you already have? And if you can quantify it at all in terms of revenue capacity within your manufacturing facilities today? And then as we look towards your revenue target for 2019, the $2,700,000,000 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? Yes. Again, Michael, I think the CapEx spending supports clearly the target for next year. I mean, and that's what we're targeting, and therefore, we stick to it. But you think you've already spent enough for that as in you've already spent enough to have capacity for the 2019 target? Yes. Plus the 2019 piece, but the 2019 piece obviously will also support years beyond. Yes. And Alex, in 2019, of course, as we mentioned, significantly lower than 'seventeen and 'eighteen. And of course, we continue to invest in our wafer fabs for VCSEL manufacturing. So there will be add on investments, but significantly lower. And 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 3 d sensing, display management and also audio. And then, of course, we mentioned today a lot of Android design wins. And obviously, we have more in the pipeline, which are all related to time of flight, so it's extra stereo vision. We see a strong momentum in display management, especially behind OLEDs. The perception in the market is very, very strong, and 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. And then, of course, charging project, the power project we have indicated some quarters ago, drives really a strong growth for us in the future. And of course, continuous growth in the audio business as well as medical, automotive and industrial business. And then just one final question on the balance sheet. Obviously, Mark, 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 kind of increase your debt further? And just can you clarify, because you mentioned, obviously, the interest expense on that is fairly low and the timeline is quite long. But are there any covenants on the debt that you have outstanding? Yes. We still have ample lines available if needed, but 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. So I think that the level of debt peaked and from the ticket from there will improve going forward. And the covenants? I don't want to comment on specific covenants, but there is nothing which worries me. Thanks very much. The next question comes from the line of David O'Connor, Exane BNP Paribas. Please go ahead. Good morning. Thanks for taking my question. A couple from my side, I would say. Maybe firstly for Michael and going back to this underutilization. Can you firstly, will that extend into the season weaker first half in twenty nineteen? Can you actually give us a utilization number for what you expect in that transition from Q3 to Q4? And I have a follow-up. It's Mikael. Good morning. I cannot give any specific utilization number. We have 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 and D development. We have seen the rapid progress in our development, which requires significantly reduced time on triple depositions. But as I said, we see improvement there. And clearly, it's always as usual, it depends on the demand pattern of our customers. And as Alex said, also we see we clearly see that the revenue seasonality for the Q1 versus the Q4 this year is being better and so less pronounced than we saw in the Q1 of 2018, and we also expect to continue this into the Q2. Understood. And maybe a follow-up then, one for Alex, on the pricing pressure you're seeing for these older than optical products. Why was that higher than you expected? If I remember back to the start of the year, initially started speaking about ASP increase. And it seems you kind of surprised slightly by the strength of that pricing pressure. And just give us a sense of how we should model the ASP trend for these kind of older products going forward. Thanks. Yes. So 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. And this new technology coming up, you bring the ASP up further. But it's always happened in the market that one of the other platform uses similar technologies for multiple generations. The next question comes from the line of Robert Sanders, Deutsche Bank. Please go ahead. Yes, 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? And I have a follow-up. I mean, when you look at the design wins we just announced, these are all new business. And actually, with our portfolio, we're creating new applications together with our customers. That means we're winning new sockets. And that's the focus of the company to win more sockets and new sockets. And got it. And 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 3 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? No, we don't see any change of our customer demand and forecasting. So we don't see this. And the business we are creating right now, especially the new three d sensing opportunities and NIDA, as you know, it's more for the next years to come. Okay. Thank you. Your next question comes from the line of Michael Firth from Vontobel. Please go ahead. Yes, good morning. Two questions. One is regarding your 4th 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 Q3? Any indication there would be helpful. And 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. So why is that needed? Thanks for the question. So for the Q4, I would say the minority is new products and new business ramping up. The majority is still business we had for a while. But certainly, we see for the Q1, 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 Q1 again. And 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 wider range, significantly wider range of investors and pools of investors than we currently can. And in that context, we want to optimize the effect from the secondary listing. Okay. Thank you. The next question comes from Gennaro 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 3 d sensing application, that is still not yet one. That's just a design activity that you're doing for them and which hasn't yet been secured. I just want to confirm that you can still achieve your 60% revenue growth between 2016 and 2019 if you don't win that particular socket? Yes, absolutely. And 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 few years of the EUR 6 percent growth was not did not include world facing design wins. So we also were very clear on that one. But we see a lot of progress going on there, and we are very excited and proud to be in the leading position here. So if I look at your next year sort of revenue profile, you've said that you could do around your Q3 or higher revenue, which is, let's say, about $480,000,000 And 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 $700,000,000 800,000,000 in those quarters to achieve the 60% growth. So 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 1 or 2 really big wins to drive that. So do you have something of that nature already for the second half of next year? Or is it that you're seeing multiple wins, which will drive that kind of wins, and I mentioned many of them already. And we do see this growth as you have just described, absolutely. Okay. And last small follow-up from me. Which are the environmental sensors that you're dropping? For environmental sensors, it's gas sensing, temperature, relative humidity and pressure. And all of them are being deemphasized? It's a deemphasized. Yes, it's deemphasized. 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 emphasized, yes. Got it. Thank you very much. The last question for today comes from Basil Taz from ODDO. Please go ahead. Yes. Hi, good morning. Thank you for taking my questions. 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 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. And then on your CAGR at 60%, just as an add on to the previous question, so to say. I mean, you need to grow for 2019, 60 plus, so to say, at this basis. So we know what is happening at your large customers, so you are not assuming here this word facing part. So which would imply basically your Android business needs to go up very heavily at this stage. So I'm not sure, did you announce something new in Q4 apart from the 2 you had previously? So 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 below display solutions for authentication, etcetera? 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. But for Q4, let's say, with Q3 earnings, you were still with the 2 design wins in the Android platform, right? So 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 3 d sensing? Yes. We mentioned, for example, 2 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, so in terms of sales you have? It's a smaller portion of the business, but we don't release the exact numbers. Okay. And you want to sell this business, right? So it's What we have communicated is that we will deemphasize the business. The path forward, we will most likely communicate in the quarter from now as we described today, but the decision today is to deemphasize the business. And most importantly, those are moving from this business to the more promising optical area you're addressing. Okay. 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. Ladies and gentlemen, the conference is now over. Thank you for choosing COSCO and thanks for participating in the conference. You may now disconnect your lines. Goodbye.