AIXTRON SE (AIXA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to AIXTRON's H1 2020 Results Conference Call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, VP of IR and Corporate Communications at AIXTRON for opening remarks and introductions.

Thank you, operator. Let me start by welcoming you all to AIXTRON's presentation of our half year and Q2 2020 results. Today, I'd like to welcome our Executive Board represented by Dr. Felix Grawert and Dr. Bernd Schulte; as well as our VP of Finance and Administration, Charles Russell. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be rerecorded or rebroadcasted without permission. Your participation in this call implies your consent to this recording. As with previous results conference calls, I trust that all participants have our results presentation slide deck, Page 2 of which contains the usual safe harbor statement. I would like to point out that this applies throughout the conference call. You may also wish to have a look at our latest IR master presentation with additional information on AIXTRON's markets and its technology, which is also available on our website. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or transcript on our website at some point after the call. I would now like to hand you over to Bernd Schulte for opening remarks. Bernd?

Many thanks, Guido. Let me all welcome you to our results presentation of the first half of 2020. And I will start, as usual, with an overview of the key developments in the second quarter on Slide 3, before handing over to Charles and Felix. With orders of nearly EUR 70 million, we had a continued solid quarter for order intake. In Q2, revenues came in at EUR 56 million, which was higher than the previous quarter revenues, but as expected, still not at the level of -- as last year's quarter. However, this is the result of the corresponding order intake during the relevant period of last year. As a consequence, revenues in the second half of the year are expected to grow significantly compared to the first half in order to achieve our full year guidance. During Q2, upon request of our customers, we experienced a few delays of commissioning of tools caused by the pandemic. For the second half of the year, we see local lockdown measures ending and an overall relaxation of travel ban. Therefore, we expect no significant influence related to COVID-19 on our entire fiscal year 2020. However, we will continue to watch the development of the global pandemic very carefully and remain to be ready to make -- to take measures as necessary. In the second quarter, our other key financials were largely in line with our plans. With gross margin -- with a gross margin of 41%, we are back to the usual level. We finished the quarter with an order backlog of EUR 157 million, which is 42% over the same period last year and gives us confidence that we can meet our 2020 full year guidance, which we communicated to you in our last call and which Felix will reiterate to you later in more detail. The renewal of our entire MOCVD product portfolio has been continued. It's making good progress and it is in advanced stage. We remain confident about our prospects in our addressable markets with our new products, as we believe that this will open new market opportunities for our equipments and get our business in an even better position in the future. At this point, let me hand you now over to Charles for a more detailed overview on the Q2 2020 numbers. Charles?

Thanks, and hello to everyone. Starting on Slide 4, our income statement. Total revenue for the quarter at EUR 56 million was higher than the EUR 41 million of the previous quarter, reflecting the phasing of orders for 2019. We have normal underutilization of production and service, which we reported in Q1 2020 has now been eliminated. The resulting 5% improvement in gross margin is largely attributable to the increased volumes. Operating expenses in the quarter of EUR 20 million were higher than the EUR 16 million in Q1 2020. The difference being -- between the 2 quarters operating expenses is down to 2 factors. Firstly, selling expenses in Q2 include EUR 0.5 million external commission. And secondly, the Q1 OpEx included a one-off credit in other income of EUR 2.9 million from the reversal of an impairment charge. EBIT was EUR 3.3 million compared with a loss of EUR 1 million in Q1. The tax rates [Audio Gap] in both the quarter and the half year because the EUR 2.9 million gain on reversal of impairment is not a taxable transaction. Therefore, net profit was also slightly above the EUR 3 million in the quarter. Turning to the balance sheet on the next slide. Inventories of EUR 91 million are higher than previous quarters in preparation for a scheduled high level of shipments in the second half of the year. The level of prototypes in inventory fell from EUR 12 million to EUR 9 million in the quarter. On an actual basis, [Audio Gap] EUR 24 million represents 30 DSO and the same is at the end of Q1. Other assets increased slightly in the quarter to EUR 13 million from EUR 5 million at the end of Q1. This is mainly because of some routine tax paid ahead and VAT and grants, which have not been received at the end of June. Customer deposits remained stable at EUR 61 million in Q2 compared with EUR 50 million at the end of Q1, reflecting our growing backlog. Looking to Slide 6, our cash flow statement. We had a negative free cash flow of EUR 11 million in the quarter, which was mainly due to the increased working capital I just mentioned. Our overall cash balance at the end of the quarter was EUR 289 million. And with that, let me now hand you over to Felix.

Thank you, Charles, welcome to you all. I will give you a short overview of development within our portfolio, of our approach to handling the pandemic and of our outlook. Let me first speak about our OLED business at APEVA. We are going through the qualification process with our Korean customer and continue to make good technical progress. We have achieved a number of technical specifications and worked towards achieving additional one. Furthermore, we are now starting discussions with our customer on the next steps of our joint OLED project. In our MOCVD business, we are seeing solid interest around our datacom laser solutions driven by the ever-growing need of fast data communication. Our equipment for the production of LEDs for fine-pitch or mini LED displays and mini LED backlighting units continues to see healthy demand. In addition, we have sold a good number of upgrade kits for the production of UVC LEDs. UVC light can be used for disinfection of air, water and surfaces. This does not represent a large portion of our revenue but gives a good contribution to profit and help to further strengthen our position in the market. In power electronics, we see strong demand, in particular from our existing silicon carbide customer and a growing demand for tools to produce gallium nitride based power devices. These devices are used, for example, in highly efficient power supplies and in compact fast charging devices for consumer electronics such as mobile phones or laptops. Let me now give you some background information on how we handled the COVID-19 challenge. Our production remains to be up and running without interruption or delay. As you know, we had implemented a number of measures early on in the crisis, and our supply chain has proven to be very stable without major shipment delays. Since early June, all our employees are back in the office, working in an increased distance to each other and wearing masks whenever proximity to others cannot be avoided. Since the return to the office, we did not have any additional cases of COVID-19 infections in the company. As a result of the above-described market demand and our stable operations, we can again confirm and reiterate our guidance for the year 2020, as illustrated on Slide 7. You may have noted on our guidance slide that we are now showing order and backlog figures, which are to be converted into revenues during 2020 rather than just looking at the timing of shipments. We've made some changes to the way we put together our guidance slide. We even update our assumptions of what we previously called shippable order intake and backlog on more exact data, mainly on what we believe will be converted into revenue this year. This means that we are not assuming 100% revenue generation from shipment of a tool anymore, but rather 90%. Generally, this is what we are actually booking on shipment, which makes the figure now more accurate. And that is the reason why we have introduced this change. With this, we continue to expect revenues to be in the range between EUR 260 million and EUR 300 million. A gross margin of approximately 40% and an EBIT margin between 10% and 15% of revenues for the full year 2020. This expectation is based on our solid order book at the end of this quarter and a healthy level of customer inquiries, particularly around next-generation power electronics, lasers for optical data communication and specialty LEDs for display applications. Our forecasted U.S. dollar-denominated orders and revenues for the remainder of the year are, as always, based on an exchange rate of USD 1.20 per euro. With that, I will pass back to Guido before we take questions.

Thank you very much, Felix, Bernd and Charles. Operator, we'll now take questions, please?

[Operator Instructions] The first question comes from Andrew Gardiner from Barclays.

If I could ask two. Firstly, just a quick one. Bernd, you referenced some slight delays in second quarter, primarily at the customer request. Can you give us a sense as to sort of what markets that might have been in and whether it was significant in terms of revenue? And are you expecting to get that back in third and fourth quarters? And then also just around the -- perhaps the reframing of guidance and the backlog that you've got to ship later this year. But actually -- so my question was more into next year. I mean, what kind of longer-term visibility do you have at the moment sort of as we look to the start of 2021 and some of the relative strength of the different end markets?

Yes. Thank you, Andrew, for the question. Yes, with the delays, I mentioned in my presentation, it is pretty much that, in the first quarter, it was mainly in China. You could not travel to China, or even within China, our Chinese team could not travel, and that delayed some few shipments to China and installations, which, in the meantime, for example, the shipments have been shipped then in Q2. And in second quarter, it was more installations dedicated for U.S. and Europe for same reasons. And it is not a huge number in terms of revenue because it's mainly -- you remember, we take about -- we take 10% of the revenue of an order with achieving the final acceptance, which basically we get once we finish the installation and meet the final acceptance requirements. So the total number is not big, but it is important for us in terms of the profitability. So it is a small one-digit, say, million numbers, which we talk here about. On the longer-term perspective, it's very difficult to say. We're certainly looking into market analysis. And this is, of course, not based on bottom-up approaches, more on longer-term expectations for market development in specific sectors. And there, we are very optimistic in the growth opportunities of the areas, I think, been mentioned by Felix. But the difficulty always is when does it really come and when does it kick off. So is it next year? Is it maybe somewhat later? It really depends what end application in the end drives the demand. So it's -- for us, we can speak more about the long-term perspective, which is looking very positive, or the short term, which is also looking positive. And unfortunately, in between, it's quite difficult to say.

Understood. Actually, if I can just follow-up on that last point quickly. You mentioned greater interest in tools for mini and micro LED moving towards fine-pitch displays. Is -- do you guys feel we're getting closer to an inflection point there? There's obviously a lot of talk about it within the market. I'm just wondering in terms of whether you feel like we are still in the prototyping phase? Or is there signs that you might start to see orders for more production volumes?

Andrew, you have to see this is a little bit more complex. First of all, there are now products sold by our customers to end applications. So this is not like visibility, it's happening now. But you have to differentiate between the colors. Particularly for the blue and green color, the market or the customers are using installed equipment, which they have acquired to -- for the general lighting demand. So there's enough capacity for blue and green for this application. However, for red, it's different. For red, you need additional capacity simply because red, capacity is pretty fully utilized due to -- you may remember, we don't need red for solid-state lighting. Yes? So there is not such a big installed base, which has been acquired during the solid-state lighting boom. And that drives basically our -- when we speak about demand for fine-pitch, mini LED, it is red LED systems, what we talk really about. And we received orders and we're going to ship tools in the second half of this year in particular for this application. So it's ongoing now.

Next up is Uwe Schupp from Deutsche Bank.

Also 2 questions from my side, please. Firstly, on the gross margin and really related to LED as well. Sorry to follow up on here. And the -- secondly, on fast charging. So first on the gross margin. If my math is correct, you actually had roughly 50% revenues from LED in the second quarter. And in the past, we are -- we have been told that LED orders are typically carrying a much lower gross margin. Yet, obviously, the gross margin in Q1 -- Q2 was much better than in Q1. So my -- just my question is how to square this up with what we are seeing. And maybe that is related to the comment you already made that really LED is no longer LED, i.e., [ more of ] goods are maybe more higher margin? Any color around that would be appreciated. And secondly, on fast charging and gallium nitride, can you just brief on how much of the CapEx for this opportunity do you think have you seen? Have your customers already been spending in terms of number of mobile phones for 5G that can be penetrated? Just some color on that would be appreciated.

Okay. Uwe, let me start with your fist question about gross margin, in particular Q2, why is Q2 so good having such a high LED content. That is -- the reason is very simple. The LED content in Q2 was not for fine-pitch or mini LED. We've seen a customer who ramping up in China, ramping up its opportunity for micro LED. And micro LED requires really high-performance, high-end MOCVD tool, which is fully automated. And with that, the micro LED prices are more like prices we are used in power electronics, et cetera, yes, so meaning with -- in the end higher margin. The -- I'm afraid you will may see -- you may see in Q3, a slight drop in gross margin because there in Q3, we're going to ship quite a few systems for red LED to China for the names what we mentioned mini LED and fine-pitch. So that's the explanation.

Let me come to your question on the fast charging gallium nitride. So gallium nitride based power electronics have multiple good cases. Fast charging is now the first good case that we see really going into volume. So we clearly have seen the inflection point, and we see that the market is in full ramp. And we see especially and we can expect to see further that right now and further in 2021, many smartphone models will be equipped with fast charging modules chargers based on gallium nitride power electronics. Interestingly, it was mostly Chinese customers taking the lead on this one. In this case, a Chinese smartphone makers being the first ones in the adoption, so we talk here about the Huawei, the Vivo, the Xiaomi, the Oppo and these guys. I think other global brands will follow later. However, I think we should not only reduce gallium nitride based power electronics to fast charging. That would be too little, yes? Fast charging is the first application adopting gallium nitride power electronics in volume, safely from the reason that the gallium nitride has a good value proposition here, but also the reliability requirement of this consumer electronic markets are relatively low, yes, such that such a new innovative material finds fast adoption. I'm personally expecting the second wave of gallium nitride based power electronics to be in highly energy-efficient data center. We speak here about the power supplies for the data centers of Google, Facebook, Amazon and the like. And also part of the second wave, we can expect on-board chargers for electric vehicles or hybrid vehicles. And later on, we can expect the third wave of gallium nitride based power electronics to be integrated or smart power, as some customers are calling that, then exploiting the capability that on one dial, we can integrate multiple switches. So from that, in a nutshell, you can say, we are seeing now the starting point, the inflection point of a multiyear growth opportunity. But I would not want to say that X many units total market size, and we've now seen X percent of that as your question was indicating.

That's very helpful indeed. And can I -- just one follow-up on -- to each of you. First, Bernd, when you say -- I actually remember you saying during various conference calls, there is no true micro LED in China. Is that statement now still valid, post your -- post the comment you made a minute ago? And then secondly, Felix, you said that the Chinese smartphone makers have actually leapfrogged the others with the fast charging. But is it true that your customer base is sitting more in Taiwan and they would be shipping those chips to the Chinese smartphone makers?

About the comment to LED -- micro LED in China. I'm afraid the statement still hold up. There are -- there is quite some ambition in China to develop micro LED. And basically, if -- even if you have a micro LED capable tool and you start producing with this tool first, what we would call a mini LED, but wanting to develop, let's say -- having a road map to reducing size of chips and going more towards micro LED, I think, this is the plan which the customer is building on. So it's true. There is no true micro LED product out of China yet.

And to the second question, where our customer base is located. Our customer base for gallium nitride, I would split it into 2 waves. The first wave of customer installations was in Europe, in the U.S. and in Taiwan, as your question is indicating. And in fact, one of our Taiwan-based customers is currently running in very high volume, producing chips, producing gallium nitride based chips and many of them are being used in China-based smartphone models. However, in the last 1.5 years, we have also seen very strong demand for gallium nitride based tool, our G5+ tool from China Mainland itself, yes? And I think we have easily shipped 1 or 2 dozens of tools in the last 1.5 years for China Mainland, not only one customer, but a number of China-based start-ups, midsized players by now, some of them -- not to forget that in China Mainland, there is a very strong and deep knowledge of compound semiconductors, which has been grown over the last decade, based on the blue LED industry, which was also based on the gallium nitride material system, yes? And we are now seeing also local production of local China customers jumping on the bandwagon. So China is becoming a market for gallium nitride by itself.

Next up is Malte Schaumann from Warburg Research.

The first one is on your order pipeline. How is your confidence of what's the stability you see in your own pipeline for current future projects? So do you feel quite confident which potentially kind of a similar order level in the second half does -- do order levels or do -- the pipeline change frequently? So what is the certainty or uncertainty you see in your order pipeline for the -- rather geared towards the short-term?

Yes. Thank you, Mr. Schaumann. I mean, so far the inquiry and quotation activity is, I mean, sitting here now. They continue on a similar level like in the first half of the year. So it's, of course, difficult to say what will happen in next quarters. But talking about now, we're seeing a similar level.

Okay. And is there a mix coming from the -- is there a shift in applications? So LED was pretty strong, especially in the first quarter, probably in the second as well. They're shifting towards another application or that is remaining kind of stable?

I think we see a similar mix in the second half as in the first half, judging on order inquiry level, yes, which is strong on the power electronics side, both GaN and silicon carbide; secondly, lasers for optical data communications; and thirdly, micro and mini LEDs, which we largely discussed in the last couple of minutes.

Yes, good. Then on the OLED project. Are you still prepared to make a decision this year if in the case an order will not follow up? Or do you see any kind of postponement in the project that might lead to a delay in the sudden taking?

So we are now about to complete the Gen2 project, yes? As we wrote in our report, we have achieved a couple of specs. We are now working with the customer on achieving additional ones and closing the specification list and then later on closing the project. And with that, we are now starting discussions with our customer on a follow-on project, which once again will be, again, an R&D type development projects, however, scaling up to a larger display size. So in the first one, on the Gen2 project, we've generally proven the feasibility study of the OVPD technology. And the next stage, yes, which is then to come in 2021, it's about proving that this can also work at large-scale substrates. That would be the next step. And we are now starting the discussions. They could conclude by the end of the year. They can move on early into next year. I think that depends really on the technical discussion because with such a project, it's not only you sit together with a customer like on an existing project and you close the deal, you negotiate the price, you sign a PO, but it's a lot of technical discussions about the specifications, what you want to achieve, how it does fit into the customer line. And only when those technical details are sorted out, you can really make a closure of the project, yes? But those discussions are now starting.

Okay. Good. And then last one -- quick one on the financials. Over the past kind of 6 quarters, you had an average R&D funding of EUR 2 million per quarter. Is that the number you would also expect going forward? Or is there kind of a change in one of the directions coming?

I think that we would expect a similar level of R&D funding into the rest of the year, really.

And any change going into next year? Or is it too early to tell?

I don't think there's much change expected at all into next year.

And the next question comes from Janardan Menon from Liberum.

Just one question on the silicon carbide side. You said your orders are still coming from your existing customer. Can you give us an update on how the qualifications with the other customers are proceeding and when you might expect a decision on that to be made?

Yes. Thank you for that question. So as mentioned, with one existing customer, we clearly see that this customer is in a ramp phase and is placing continually orders every quarter, 1, 2, 3 tools. So that is very, very nice and enjoyable. We are positive on concluding the qualification with the other customers. And I think it's just a question of the volume ramp and the production facility expansion at the other customers when an order is going to be placed. It's not a question of whether an order will be placed, but it's a question, rather, is it going to be placed in Q4? Or is it going to be placed in Q1? And that surely depends on the volume and capacity needs of our customers.

So would those new customers be having a sort of a dual platform strategy, you and your competitor? Or would they be moving entirely to you?

Well, I think the existing base is with our competitor, and the existing base is already a number of tools. So I would expect the largest part of the ongoing expansion to be with our tools once we can convince the customer of our tool. Because our objective is very clearly to have a lower cost of ownership so there should not be a reason to buy a competitor tool again.