Ladies and gentlemen, good morning. Welcome to the ams first quarter 2018 results conference call. I am Alice, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. 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 happy to welcome you this morning to our conference call on the first quarter results. As usual, Alex will run you through the developments in our business, then Michael will give you more details on our financial performance. Without further ado, Alex, please.
Thank you, Moritz. Good morning, ladies and gentlemen. I'm very happy to welcome you to our first 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 first quarter revenues came in at $452.7 million, well within our guidance range and up 147% compared to the first quarter last year. Our adjusted gross margin, excluding acquisition-based and share-based compensation cost, was 36% in the first quarter. Our adjusted EBIT, excluding acquisition-based and share-based compensation cost for the first quarter, was $77.3 million or 17% of revenue, in line with our guidance, which was more than 15 times last year's level. Our business showed a solid performance in the first quarter and recorded strong year-on-year growth despite customer volume effects that had an impact on our consumer business.
This positive result is based on the strength of our differentiated sensor solution portfolio, while we continue to pursue our strategy to capture multiple long-term growth opportunities. Let me look at the developments on the consumer side first. Our consumer and communication business started into the year on a positive but more balanced note in the first quarter. While our consumer solutions continue to be successful in the market, this success was moderated by customer-driven volume effects in our smartphone business, which we experienced in the first quarter. We had previously mentioned that we expected customer volume effects in the first quarter. However, the actual end market development drove more pronounced volume effects for the quarter. As a consequence, we saw a somewhat more meaningful impact on our consumer business in the quarter from customer performance and related volumes.
Despite these short-term effects, we are the leading player in optical sensing and provide high-performance optical sensing solutions to our world's largest smartphone and consumer OEMs, including 3D sensing optical systems, true color display management, proximity sensing, and other optical sensing applications. With the focus on immersion applications, we continue to drive innovations around optical technologies for long-term growth markets. Our optical sensing portfolio spans a wide array of hardware and software. Here we recently added leading software IP for 3D face recognition through the acquisition of KeyLemon, which closed in the quarter. While we are experiencing a more difficult short-term demand environment in the smartphone market, we see consumer OEMs actively engaging with us on 3D sensing and other new upcoming sensing functionalities, all driven by the need for differentiation. We pursue our comprehensive multi-generation roadmap in 3D sensing based on our broad portfolio of relevant technologies.
At the same time, we prepare for significantly broader adoption of 3D sensing in the consumer market. Besides the large 3D program win in Asia that we were able to disclose a while ago, we are strongly involved in 3D sensing design activities at several mobile device OEMs. We currently expect potential additional 3D business to start from the very late 2018 onwards. Our VCSEL and VCSEL driver capabilities are a key element of our 3D sensing portfolio. We see strong market traction continued in this field. The ams specific VCSEL technology we are able to leverage creates a clear competitive advantage for our 3D sensing strategy when we look at the coming years. We believe that some of these advantages will become more relevant in the future as we focus on where technology is going and not where technology is today.
Moreover, given the complexity of 3D sensing, our broad solution expertise is another important differentiator as we build a leading position in the 3D market. We also work on extensive product development in future areas of optical sensing, including spectral sensing for mobile applications such as color match and food sensing. Market traction in this new area clearly continues to increase. We expect first small-scale shipments of a spectral sensing solution for an Asian mobile consumer OEM before the end of 2018. At the same time, our spectral sensing solutions for high-quality blood pressure measurement is seeing more and more interest from consumer OEMs that are exploring ways to create new mobile device applications with our technology. We are also developing other multi-sensor solutions for consumer applications, such as audio and pressure sensing combinations for mobile devices.
All of these activities focus on our core sensing areas and allow us to access new growth opportunities for the coming years. Our other consumer product lines, including audio sense solutions, saw continued attractive run rates at the range of device vendors and contributed positively to our first quarter. Let me now come to our other areas of the non-consumer side. Our industrial, medical, and automotive business had a good start into the year in the first quarter, performing in line with to slightly ahead of expectations. In industrial markets, the overall demand situation remains attractive across product lines for automation, building control, harbor, and emerging industrial IoT. Our strong position in industrial sensing is built around innovation and the ability to support challenging applications for major OEMs and their customers. In imaging, we recently received an important industry award for a highly innovative industrial imaging solution.
Our medical business recorded another quarter of attractive results as we extend our medical imaging portfolio for computed tomography, digital X-ray, and mammography, and work to expand our OEM customer base. At the same time, we are focused on advancing our NanEye miniature camera technology. Our automotive business also continued to perform well with its broad range of solutions for safety, driver assistance, position, and chassis control. We are encouraged by the early large program win for VCSEL illumination in automotive 3D LiDAR, which we announced recently. The projected lifetime value of this win has since increased by more than $500 million to over $1.1 billion for this program alone. This impressive development clearly demonstrates the very large-scale opportunities for 3D sensing in the automotive market.
Our success also confirms the key relevance of solid-state LiDAR technology for autonomous driving systems and the path from Level 3 to Level 4 system deployment. Our unmatched ability to combine very high-power VCSEL and advanced driver circuits into highly differentiated illumination solutions create significant competitive advantage for this long-term market as market interest continues to grow. In addition, we are seeing increasing traction for innovative 3D sensing opportunities in-cabin, that is inside the vehicle, where we offer broad expertise and a range of relevant technologies. Here we are close to design success with a different Tier 1 automotive supplier for small volume in-cabin 3D application. All in all, automotive 3D sensing is quickly becoming a very exciting area of opportunity and design win potential for ams.
Looking at our VCSEL strategy, the investment into internal VCSEL manufacturing line in Singapore is progressing to plan, and we are confident about our ability to support large-scale internal production of differentiated high-power VCSEL in 2019. Let me now come to the outlook of our business. For the second quarter, we expect a significant short-term impact in our consumer business from strongly accelerated customer-driven product transitions, which are related to large smartphone programs. We have now received confirmation that the product transition in large-scale customer programs in our smartphone business is strongly accelerated by the customer. That means that current products are being de-emphasized substantially faster compared to previous generation to generation changes, with strongly negative volume effects for ams. Given the relevance of these programs, this development will have a significant short-term revenue impact on our consumer business.
On the other hand, our non-consumer business are expected to continue their solid development in the second quarter. As a result of these impacts, we expect second quarter revenues of $220 million-$250 million, which will still be up between 10%-25% year-on-year based on available information. First half revenues are therefore expected to show strong growth of 87%-96% compared to the first half of last year. As previously mentioned, we are preparing for major ramp-ups in the second half 2018 related to high-volume optical solutions for consumer 3D sensing applications, among others. To this end, we focus on making sure that all required resources for the substantial ramp-ups we see coming up are available as needed.
Consequently, to avoid unwanted risk, we do not pursue short-term reduction of our trained workforce in our Asian manufacturing locations, even though we see an impending significant underutilization of production capacity in the remainder of the first half. This underutilization is partly driven by mainstream smartphone product transition and related volume effects. In addition, we have now received confirmation that product changes in a major consumer program ramping up later this year are not released for production by the customer yet, and this prevents us from pre-producing certain parts in the current quarter. This development will contribute further to underutilization in our Singapore facilities in the second quarter. We therefore see a situation that is very similar to the one experienced a year ago around the same time. However, we are now burdened by the full effect of depreciation and certain ongoing operating costs regarding the installed capacity.
Driven by this underutilization of capacity and based on current information, the adjusted operating margin for the second quarter, excluding acquisition-based and share-based compensation costs, is expected to be significantly negative at around -20% to -25%. However, looking forward towards future years, we do not expect a recurrence of such short-term transition effects on a similar scale. This is because we see a ramp-up seasonality within a year to be more balanced from 2019 onwards as we expect to have a broader base of consumer OEMs in optical sensing. Furthermore, and despite the short-term volume effects, we remain convinced that our strong position and growth potential in several of the most exciting growth areas in sensing, which is underscored by the excellent market traction we see with OEMs across end markets. Our midterm growth and profitability targets respectively the 2016-2019 periods and onwards remain unchanged.
Let me now hand over to Michael for more details on the financials.
Thank you, Alex, and good morning, ladies and gentlemen. It is my pleasure to give you an overview of our IFRS and adjusted consolidated numbers for the first quarter 2018. Let me start with our P&L at the top-line development. Alex already mentioned that our first quarter group revenues were $452.7 million, a record level for a first quarter, and well in line with our guidance range. As announced with the full-year results, we have moved to presenting our financial information in US dollars from this quarter using currency conversion of the financial statement data. This is based on a weighted exchange rate consistent with industry practice, and our quarterly reports also include the underlying financial statements in Europe. We recorded a strong 147% year-over-year growth, while we saw a sequential decrease compared to the previous quarter as expected.
However, as mentioned by Alex, customer volume effects played through in a more pronounced manner, impacting revenues more than previously thought. Our adjusted gross margin excluded acquisition-related and share-based compensation costs was 36%, compared to 44% in Q1 last year. Our IFRS reported gross margin was 33%, compared to 40% in Q1 last year. The gross margin development particularly reflects product mix and utilization effects in our production facilities in Singapore during the quarter. Our R&D spending was $61.5 million in the first quarter 2018, compared to $57.2 million in Q1 last year. In relative terms, this means 14% of revenues, which is only slightly above last quarter's level. Main reasons for the year-on-year absolute increase was the addition of design center and R&D resources over the course of the year.
While there are always quarter-to-quarter movement in R&D spending, we expect a similar level in absolute terms in Q2, given our ongoing focus on R&D to drive innovation. We expect continued meaningful levels of spending for a number of platform developments and major product opportunities we work on for the coming years. We also see our long-term target for R&D spending now at well below 15% of revenues, helped by the growth we target for the coming years. Further down our P&L, SG&A costs were $43.7 million, compared to $36.8 million in the first quarter of 2017. As in the case of R&D, this absolute increase primarily reflects the higher SG&A costs we added from acquisitions and expansion of resources, as well as certain higher IFRS 2-related costs.
In relative terms, we spent 10% of revenues for SG&A in the quarter, which is strongly below last year's level and only slightly up on a sequential basis. We expect about a similar level of spending in absolute terms in the second quarter. Looking forward, we have already updated our long-term target for SG&A costs to below 10% of revenues, and we continue to work towards that. Our other operating income of $3.9 million for the first quarter, compared to $4.3 million in Q1 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.
As a consequence, our adjusted operating result or EBIT, excluding acquisition-related and share-based compensation costs for the first quarter, came in at $77.3 million, a record level for a first quarter or 17% of revenues in line with previous guidance. This result was strongly up from $5 million or 3% of revenues in Q1 last year. The IFRS reported result from operations for the first quarter was $46.5 million or 10% of revenues, up from -$16.9 million in the same period 2017. Our net financial result was $32.1 million, strongly influenced by several one-off non-cash effects and compared to -$3.2 million in Q1 last year. We recorded a large effect from the unwinding of the liability of the Heptagon earn-out, given the announced and implemented change in structure of the earn-out payment and valuation adjustments.
Moreover, we recorded a positive effect from a revaluation of a financial investment according to IFRS rules and a smaller effect from the unwinding of a call option related to the Heptagon earn-out. Besides these effects, we recorded a larger effect from the change in the value of the option element of the foreign currency convertible bond as required by accounting rules. The financial result also reflects non-cash valuation adjustments for foreign currency balance sheet items and interest expenses. Looking at the adjusted net results for the quarter, this came in at $99.9 million, driven by this significant one-off effect from the financial result and compared to -$19.9 million in the same period last year.
Adjusted basic and diluted earnings per share were CHF 1.20 and CHF 1.12, or $1.25 and $1.17, compared to CHF -0.23 or $ -0.27 and $ -0.26 respectively for the first quarter of 2017, which also reflects a lower share count last year. Our total backlog on March 31st, 2018, stood at $345.9 million, down from $666.1 million we saw at the end of the fourth quarter of 2017 and up from $240.4 million on March 31st, 2017. The current backlog is on a similar level that at the end of March. Let me give you some additional figures from the balance sheet and the cash flow statement to complete the picture. Our cash and cash equivalents, including short-term investments, stood at $525 million at the end of the quarter. This increase includes effects from the convertible bond issue in February.
Our net debt position was $1.3 billion at the end of Q1, reflecting the convertible bond issue last year and this year. We are required to account for the US dollar-denominated convertible bond fully as debt, whereas the option portion of the 2018 convertible bond is accounted for in equity. Our trade receivables stood at $316 million, slightly down from $350 million at the end of the fourth quarter. The decrease reflects the top-line development. Our DSO ratio was 55 days, up from 48 days in Q1 last year. Inventories were $301 million, compared to $312 million at the end of the fourth quarter. The finished goods portion of our inventory remained at close to 25%. Liability side, we have a current debt position of $428.2 million. Our long-term debt stood at $1.38 billion at the end of March.
Our long-term debt was generally taken on to bolster liquidity, support CapEx, past acquisitions, and potential future M&A. Apart from the recently issued convertible bond, the debt mainly consists of unsecured loans of a long-term nature. As mentioned before, this long-term debt position includes the convertible bonds based on the relevant treatment under IFRS rules. Our operating cash flow in Q1 2018 was $56.3 million, up from $32 million we saw in the first quarter last year. This positive development was mainly due to a strong result and higher depreciation. Our CapEx in the first quarter was again significant at $174 million compared to $116 million in Q1 last year, reflecting further planned investments into capacity expansion for needs from the second half 2018 onwards. Long term, our target CapEx to sales ratio is expected to be between 10%-15% to support the ongoing growth of our business.
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 their touch-tone telephone. You will hear a tone to confirm that you have 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 handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Achal Sultania, Credit Suisse. Please go ahead, sir.
Hi. Morning. Two questions from my side. First, can you talk about the utilization levels that you saw at a very broad level, both in Q4 and Q1? The point that I'm trying to understand is that your gross margins went down from 40%-36% clean this quarter, and it seems like Q2 gross margins are going to be around 15%-20% based on what you're guiding. Just trying to understand, given the volatility that we have in gross margins, is it possible to do a 40%-plus gross margins on a full-year basis on a sustainable trend, given that you will always have this kind of seasonality with your large customer in one quarter or two quarters in a year?
I'm just trying to understand what is causing. What is the level of underutilization right now, and how much improvement you can make once you get to full utilization? Thanks. I have a follow-up.
Yeah. Good morning, this is Michael. Let me take this question. First of all, we're not guiding into the second half as before, but we clearly expect that the very strong underutilization we see now in the second quarter to reverse in the second half through large volume ramps with related positive effects on profitability. In the first quarter, certainly we had some progress mix effects, and also certain underutilization. As you can see, if you compare revenues in the fourth quarter, where we've been fully utilized with revenues in the first quarter. We do not spread out any details on this effect, but I think it's obvious.
Okay. Maybe a follow-up, Michael, on this. There was some expectation that your large customer is going to start to have an iPad or a tablet launch at some point, which probably will have facial recognition as well. Given how you're guiding for Q2, it seems like none of that is actually included in Q2. I'm just trying to understand, is it just a timing issue with the product, or is it more about the technology being not ready as yet to be adopted in a tablet device as yet? Thanks.
Yeah, Alexia, thanks for the question. I think the technology from our perspective is the same or similar to iPhone from the concept point of view. We cannot give any kind of details about product ramps for our customer, as you know. We clearly see the second quarter as a very strong transition quarter between one generation to the other. We are confident with the ramp in the second half, which would include this, but we cannot comment on different products launches of our customer.
Okay. Thank you, Alex.
Our next question comes from Andrew Gardiner, Barclays. Please go ahead.
Good morning, gentlemen. Thanks for taking the question. I just had a sort of couple on some of the near term. Firstly, in the first quarter itself, you mentioned that sort of customer volume effects were greater than anticipated, but you guys sort of made the middle of the guided range in terms of revenue. Can you give us some sense as to what may have improved better than you had anticipated to help offset? Also as we look into second quarter, I think I can understand sort of what you're talking about in terms of the sort of the transition, and this sort of inability, it sounds like the specs aren't quite ready, so therefore you can't sort of quote, preproduce the parts. Presumably you need to know relatively soon, otherwise, that steep ramp that you talk about will be even more difficult.
I mean, when do you need to know by in order to get the tooling set and the ramp happening? Is that weeks? Is it sort of in the next month or so? A bit more detail there would be helpful. Thank you.
Yeah, Alexia, thanks for the question. Obviously the volume effect in the first quarter was more to the back end of the quarter. The ramp for the second half of the year is, we are very confident it's basically similar to last year's. This goes via standard procedure between customer release dates and our readiness. We are ready, but of course, the customer release date of their own products is the green light for our ramp-up production. This is on schedule. Obviously, if this would have been earlier what we have expected, we could have done pre-production in the second quarter.
If I could just sort of follow up on that, in terms of the sort of volume impact in the first quarter, sort of declining late in the quarter, sort of through March. Given how steep that has been and how much of a surprise it is, do you have any risk of sort of inventory obsolescence? Is that factored into the 2Q guidance at all? In terms of the second half ramp that you just sort of reiterated there, in February when you guys talked about the full year, you were willing to say then that it would be similar sort of directionally to what you saw in 2017.
I know you didn't want to quantify it at sort of the 120% or so that was in 2017, but you were at least willing to say sort of high double-digit, half on half growth. Is that still reasonable? Thank you.
Yeah. Hi, Andrew. It's Michael. First, let me allude to the second half ramp. I think we expect a strong ramp up, as I said. Just the schedule of it is probably more like in prior years. The magnitude obviously also depends on the smartphone market and where we see difficulties in the market or not, what we cannot assess now. I believe it's too early. With regard to obsolescence, we don't have any inventory obsolescence or write-offs planned. I think everything else is in line with what we expected before and what we see how this year pans out.
Thank you.
The next question comes from Robert Sanders, Deutsche Bank. Please go ahead.
Yeah. Hi, good morning. My first question was just, if you could just give a bit more clarity on the reasons for the late spec change or should I say the lateness for them to give you the detail on the spec change. I mean, is that just affecting the dot projector, or do you think it's affecting the entire 3D sensing system? Would that have an impact on your color sensing business? That sits on the adjacent to the dot projector. If you could just give us a bit more understanding of what is going through the mind of this OEM. I would have thought this would be more of a software type thing, but clearly the hardware is obviously important too.
Yeah, Alex. Well, as you know, we cannot comment on customer specifications and so on. We don't see big changes to previous years when customers in general specify their products and then there is a certain period of time where the customers say, "Now it's released for production." This is the process we are going through here. We see if you compare this to last year, it's very similar, based on discussion we had, we would have expected earlier releases so that to enable us to have pre-production, this is unfortunately not the case here. We don't see any impact on that. Well, this is general setup for the second half ramp up.
Got it.
Any impact on that.
Got it. Then, if given that you can't pre-build now, and this looks like it's going to happen every year, I still can't quite understand if you're building for Q4 peak volume, which is obviously going to be very high compared to the rest of the year, how can you keep your Singapore line loaded through the year, in any year? Because that is still something I'm struggling with, because in the past you've said you can make 30% EBIT margin in consumer, but to do that, surely that would assume that you could keep those facilities fully loaded through the year, and that doesn't seem to be something that seems likely anymore. Is that fair?
Yeah, Rob. This is Michael. Let me take that question. I think there are two answers to it. First of all, we expect the ramp-up to happen earlier this year than last year. Secondly, with respect to seasonality in upcoming years, I think we mentioned it, we start to see traction, as we said earlier several times, with Android customers, so in 2019 the earliest. If that is happening, what we currently probably can expect, then certainly seasonality is lower. Plus, in addition, we mentioned it also, this spec change for a second generation must not happen every year. This happens this year, that doesn't necessarily mean it happens next year again. If it doesn't happen next year, then obviously, we can do that pre-production and we can somehow mitigate that effect.
Got it. Thank you.
Next question comes from Sandeep Deshpande, JP Morgan. Please go ahead, sir.
Hi, thanks for letting me on. I have three short questions, if I may. Firstly, Alex, regarding the first quarter of the year, when we look at your gross margin, which was slightly underwhelming, have you already started ramping up the capacity that you need for the second half of the year based on whatever customer indications you have? Secondly, do you already have customer orders for the second half of the year? Of course, the exact numbers may change, and that's based on a rolling forecast, but based on how much do you have orders from the customer already regarding how much capacity you should build for the second half of the year? Thirdly, in terms of your second quarter guidance, in terms of margin, of course there is a large part of fixed cost associated with D&A in there.
If you exclude the D&A, would there still be a cash loss in the quarter?
Yeah, Alex, I take the first two questions. Yes, you're right. In Q1, we're starting to add capacity, according to the ramp-up plan we discussed with the customer. This is very similar to last year, and we have to add capacity based on the forecast we receive from the customer for the second half. This is also the answer to the second question. It's exactly the same procedure as last year. We based our capacity expansion, which relates to tools and also headcounts, people, based on confirmation of the forecast from our customer. It is exactly the same as last year.
the third question, sir.
Yes, that's Michael. Let me take the second question.
Okay.
It's regarding the cash. Well, we certainly need to go through the quarter to see what is happening. As we said, we have ongoing CapEx requirements to prepare ourselves for the second half of the year and later on. We have our dividend payment in the second quarter. I guess it's probably around the zero line.
Okay. One follow-up I have for you, Alex, which was, in terms of the ramp that you have of the product in the second half, what we understood in your last set of results was that you have a potential for content increase in the second half. Does that still exist, the potential for the content increase?
Yes. The potential still is there that we see content increase. We see it for this year, but we also see it in areas which will come up next year also with other customers.
Thank you.
The next question comes from David Mulholland, UBS. Please go ahead, sir.
Hi. Thanks for taking the questions. Just following up on the last point. I guess, like for like, as we look into the second half. Your commentary from two, three months ago was very much to see pricing going up, I guess, versus where you were two or three months ago rather than just like in a year-over-year basis. How do pricing expectations into the second half sit today? I guess that's part of the question I know everyone's trying to get to on the second half outlook. Secondly, when do you actually think you will get a bit more commitment from Android OEMs to 3D sensing and actually be able to talk about more design wins for 2019? Is that something that might actually come this year, or will we be waiting till next year to get that?
David, thanks for the question. Alex here. The statement's exactly the same as last time. We see pricing goes up because of content increase and higher complexity, obviously we're still in discussion with customers, this is a standard process, exactly the same as last year. The Android camp, we see very strong commitment from those guys. We are in discussion with nearly everyone. We see a very strong engagement there. As I mentioned last time and also last year, we clearly see that it's a very high complexity for those guys to implement those systems, we are there to support this and trying to implement this with them together. It's a very technical, complex situation for the Android camp, we see different approaches, as I mentioned last quarter, different approaches from those customers in which direction they are going.
That's great. One quick follow-up. Obviously, whenever you did the Heptagon deal, it was understood there was a kind of commitment from a customer, given the CapEx you were spending. I assume at this point that's now in the past, or is there still any commitment from the customer, regardless of what happens volume-wise on ramp, that you will get paid given the CapEx you're spending?
This is Michael. I'm happy to take this question. The customer offered us this possibility, we're obviously discussing it since we have no conclusion on it yet.
There's potentially still a situation like that you could put in place this year?
Correct. Yeah.
That's great. Thanks very much.
The next question comes from Michael Furth with Stifel. Please go ahead.
Yes. Hi, gentlemen. Just two questions from my side. I was wondering, in your 3D sensing solution, what improvements have you made to the solution compared to a year ago? You mentioned it's basically higher specs, higher complexity. Can you be more specific what you have changed? The second question is regarding your CapEx expectations for this year. Can you just update us what you expect there? Thank you.
Alex, your first question, there is continuous improvement from two angles. One is what we are driving. This is based on power consumption, resolution, form factor, and so on, but also what the customer is requiring. But there we cannot go in detail. We have quite some new concepts in the pipeline we don't want to reveal, especially in the area of the Android implementation, where we want to help customers to implement more complex products more easily. Please understand, we can't reveal what we're doing there.
Sure.
With regard to CapEx, this is Michael, I think there is no significant change to what we had said previously. It's going to be a significant number, but it's certainly less than last year.
Okay. Thank you.
Next question comes from Juergen Wagner, Mainfirst. Please go ahead.
Good morning. Thank you for taking my question. You mentioned the increased lifetime value for your LiDAR project, how can that double within a couple of weeks, and when should we see first revenues? Second question, you mentioned there was no inventory obsolescence in Q2, but looking at what you report in the balance sheet and the cash flow, there was some difference in Q1. Where is that coming from? Thank you.
Let me take, Alex, the first question. The 3D LiDAR is actually a very interesting business we are looking at. As you mentioned, it increased significantly, this is simply for the fact that our system integrator has nowadays not only one large end customer, but more customers are working with our system integrator, that's a very simple effect that therefore the volume goes up. In addition, we are also looking at, even at the stage right now, to offer systems with higher resolution than previously requested, and this drives cost up and therefore the ASP up. It's a combination of more customers, more volume, and we see an increasing ASP even. It's quite positive.
Okay.
The traction is very strong. As you rightfully say, that this happens in a very short period of time is quite impressive, specifically in the automotive business.
Yep.
Let me take the second question. It's Michael here. I can confirm that there was no inventory depreciation or anything in the first quarter, I do not expect anything in the second quarter. We don't see it.
Okay. Thank you.
The next question comes from Lee Simpson from Stifel. Please go ahead.
Great. Good morning. Thanks for squeezing me in here. Maybe going back to some of the earlier questions, but try and answer them maybe or asking them a little differently. You mentioned the possible pre-production ramp with a customer is absent at this point. If we look to the sort of Q3, Q2 transition that's normal for a business like this, do we see anything out of line with that normal transition, given the size of ASP uplift that you expect with new generation designs? Maybe secondly, just looking again at that underutilization in Q1 and Q2, could you maybe tell us what is the qualification time for new tools? And if it is three to six months, is it possible that we get a 40%+ gross margin in Q3 if we cross back over, let's say, EUR 350 million sales?
Maybe the last one from me is, what can you tell us around architectural changes for 3DS in 2020 timeframe, and perhaps the mixed use of new materials and others? Where does that leave ams? Do you think there'll be a big architectural change in that timeframe? Thanks.
Yeah. Hi, this is Michael. Let me take your question on the margin development. I think as we have clearly seen in the first quarter and also guided for in the second quarter, there is a strong dependency on the utilization rate of our production facilities to guide to anything here. Clearly, we have our expectation with the ramp-up and how it goes into the quarter, but there is a strong dependency, as Alex said before, on the release date of the next generation programs. We're currently installing additional capacity. We get this capacity qualified, and as soon as this is done and the product is released, we will start ramping. Whenever this is happening in a quarter or in a month, it certainly drives the gross margin development.
It would be pure speculation to say anything, whether this is happening now or then because it's a matter of timing.
To your first question, the transition Q1, Q2, Q3 is actually very similar to last year. The difference is that this year we have installed capacity already, which last year we didn't have. The process of releasing products is very similar. This year, it would have had to have the release date earlier, so we can do pre-production. What didn't happen, as mentioned. For the technology changes, we see certainly changes coming also from our side from year 2020 onwards. We do this in all directions, whether it's time-of-flight, structured light. We have a very strong innovation pipeline within the company, and we're looking also for specific solutions towards the Android camp. This includes software, which we don't do for the other side.
Great. Just for clarity, if I could. The qualification time, not installation time on new tools is right about three to six months. Effectively, Q1 is a set-up for Q3 and Q2 likewise, a set-up, at least capacity-wise, for Q4. The margin peak is Q4 on a fully loaded facility, and that Q3 is a transition, let's say, a 40% plus gross margin story. Do we think that's doable at this stage?
I think I mentioned it before. We don't guide that, and it depends on how the ramp-up pans out.
Okay. Thanks, guys.
The next question comes from David O'Connor, Exane BNP Paribas. Please go ahead, sir.
Yeah. Good morning, gentlemen. Thanks for taking my questions. A couple from my side, maybe follow up some previous ones. Just following up maybe from Lee's question there last. Michael, what gives you the confidence that the ramp-up is earlier this year versus 2017? You mentioned that previously when you seem to be running later than your initial production plan. That's my first question. Then the second question for Alex, going back to the Q2 guide again, and again, there's a couple of questions on that, but it's so weak it suggests that there's a weakness across, not just the 3D sensing program, which I think we all understand, but other programs as well. Just wondering, what's the risk that this softness continues into Q3 on the other programs? Then maybe a last question, if I can sneak one more in.
You talk about the intra-year ramp-up seasonality more balanced from 2019 onwards. What gives you confidence to be able to project this even though you're broadening your base with your number 1 customer is still growing faster than this? Any color around these questions would be helpful. Thanks.
Okay, Alex here. On the ramp, your first question.
Maybe we should phrase it differently. Not that the ramp is earlier this year, it's not as late as last year. If you remember last year, it was a bit later than normally, and I think this year it's as in previous years, it's coming on time. I would say it that way. Simply for the fact the technology is already in the 2nd generation, a lot of issues have been resolved in a complete value chain. That's why I would say this year is as in previous years, last year was a bit later. Weakness in Q3, you mentioned. Based on the forecast from our customers, based on discussions we have, we are confident in Q3. I think this is also different because you're talking now from 1 phone generation to the other, and it's not the same generation for the next quarter.
I think there's a difference of Q2 and Q3 because Q3 is a new generation. For 2019, your question, well, based on what we see in the marketplace, what we have on the pipeline, we expect that we deliver on our midterm guidance. Based on all information we have available today.
That's helpful. Thank you.
The next question comes from Alan Tong from Prudential. Please go ahead. Mr. Tong, your line is open. You may ask your question. Mr. Alan Tong from Prudential, maybe your line is muted.
Please take the next question.
We will go and take the next question, which comes from Robin Brass, from Hauck & Aufhäuser. Please go ahead.
Yes, hello. I have one follow-up also on the Android customer designs currently. Is it fair to assume again that this is for 2019, given that it is almost May now in 2018? Secondly, or a part of this question is also looking at the CapEx for this year. In case you have further design wins, I would say, would that also need more CapEx investments, or how is your current plan here?
Let me take, Alex here, the first question. As stated last quarter, we clearly see that meaningful ramp for the Android business will happen in 2019. Just to mention that we could see a small, the beginning of a ramp in 2018 already for one program we have, but a meaningful ramp we see for 2019 only. The reason is very simple. It is a highly complex system. It is not easy to incorporate this in the phone if you do not have long-term experience there. It is a very natural thing that it will happen only next year. We have this opinion since quite a while, and it shows every day it is proven.
Let me take your question with regard to CapEx. What we currently believe is based on what we see in the market and with forecast from our customers and with developments we are going to have, Alex mentioned our progress with the VCSEL manufacturing. We see a significant decline of our CapEx needs in 2019. Obviously not knowing yet what we would need to prepare for in 2020 or 2021 ramp-ups, which we maybe have in the pipeline now, but which are not concluded on yet. What we currently have in the forecast and what we currently see will be a significantly lower CapEx in 2019.
Okay. Thank you.
The next question comes from Douglas Smith, Agency Partners. Please go ahead.
Hi there. I was wondering if you could talk a little bit about the competitive environment in 3D sensing, how you see potential competitors emerging and the potential for large OEMs requiring to dual source some of the technologies.
That's a great question. We see the similar competitors as we have seen last year. We feel extremely confident and comfortable with our positioning because we have, for obvious reasons, the broadest portfolio, goes most deep into the value chain, and also understand and are able to supply the complete system, including software. This is a very, very competitive position we have there. I mentioned before in the call that we have a very strong IP pipeline, especially in the 3D sensing area. This helps us to, I would say, to accelerate our situation and competitiveness over time. The second question, can you repeat that one?
The possibility that large OEMs may necessarily require dual sourcing for some of their critical-
Okay
component technologies.
Well, yeah. Every customer has the desire to have dual sourcing at a certain period of time. I can tell you in this situation, customers will be happy to have a complete and functional solution in their phones. Over time, of course, they're looking, but this is our strategy that we continue to innovate, to offer the most differentiating products and solutions just to make sure that there are less and less dual sources possible. You cannot exclude it, but I think our position is very strong there.
Thank you very much.
Great.
The next question comes from Horst Simbürger, Convertinvest. Please go ahead. Mr. Simbürger, your line is open. Mr. Horst Simbürger from Convertinvest, you may ask your questions. Your line is open. I will proceed and take the next question, if I may. The next question comes from Vikram Kumar from Kuvari Partners. Please go ahead.
Thank you for your time. I just get confused, given what you've said about not yet being clear on the spec and content value with this redesign for H2 this year, and given, though, you're having active discussions with the Android customer base, but we're not yet clear what comes through in contract and therefore ramp. How is it that we formulated and then restated our 2019 revenue number, given that uncertainty in some of those parameters?
For the ramp for this year, and then what we predict, of course, for next year, this is a standard procedure. This is no different to last year or the years before. This is not something special. The only thing, what we mentioned is the pre-production, where we planned to do so, but because of release date, it's not possible. In the systematics and the structure of defining specs, agreeing on commercial agreements, getting forecasts, getting orders is exactly the same. There is no difference.
Sorry, just to be clear, before I come to the Android, on this specific one large OEM customer, unless I misunderstood something, we don't actually know yet what the H2 content spec will be in this reformulation. We don't know what that will look like in 2019 either. Is that not correct?
We know exactly what the customer requests. We know the spec. That's why our development is done according to the spec of the customer.
Okay.
The question is the release date when the product is released for production.
Oh, okay.
whole thing. If you don't know it, you cannot develop a product. This is all exactly the same as the years before.
Okay. You have a view on your because I thought you said earlier that you felt the ASP will be up, but you were still in discussions. What you're saying now is the volume ramp and timing, you don't know release, but you internally do know what your content will be in this reformulation, both for H2 and then therefore likely in 2019 with this large customer. Is that true?
Yeah. We know the spec, we know the products, and all the rest will be finalized.
Got you.
Same like last year. Same like last year.
Got you.
No difference. Yeah.
Okay, that's great. On the second part of my question with what have you seen for other customers in your 2019 guidance, please remind me, Android customers, et cetera.
As mentioned, we have publicly announced one big design win, and we are in process, in discussion with large OEMs for further design wins, but they will be realized in the year 2019 and not 2018. This is relevant for our 2019 year guidance.
Okay. It does require some further wins beyond the large customer, beyond the one design win you've announced. You are assuming some further wins at ramp in 2019 to get to your EUR 2.2 billion target.
We do have a very broad pipeline, and this is, again, same as the years before. You have a broad pipeline of opportunities, very specific discussions with customers, and then month by month or quarter by quarter, official design wins happen, and then you do the ramp planning and forecasting discussion.
Okay.
Yes.
Thank you.
Yeah.
Thank you.
Pleasure.
Ladies and gentlemen, this concludes our question and answer session for today. We thank you very much for joining us this morning, and we look forward to speaking to you again with our next set of results. Thank you very much and have a good day.
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