AIXTRON SE (AIXA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the conference call of AIXTRON SE regarding the Full Year and Q4 2021 Results. [Operator Instructions] Let me now turn the floor over to your host, Guido Pickert.

Thank you very much, operator. Welcome to AIXTRON's presentation of our Q4 and Full Year '21 Results. I'd like to welcome our CEO, Dr. Felix Grawert; as well as our CFO, Dr. Christian Danninger. As the operator indicated, this call is being recorded by AIXTRON is considered copyright material. As such, it cannot be recorded or rebroadcast without explicit permission. Your participation in this call implies your consent to this recording. Please take note of our safe harbor statement, which can be found on Page 2 of our results presentation slide deck as it applies throughout the conference call. 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 under the Events section. I would now like to hand you over to our CEO, Dr. Felix Grawert for opening remarks. Felix?

Thank you, Guido. Let me also welcome you all to our full year 2021 results presentation. I will start with an overview of the highlights in the year and then hand over to Christian for more details on our financial figures and our ESG-related initiatives. Finally, I will give you an update on the development of our business, and I will present our new 2022 full year guidance to you. Let me start by giving you an overview of the key development in Q4 and the year on slide 2. Here, let me start with a very good news about our business development in 2021. This was a very exciting and successful year for us. We were able to increase our order by 65% and our revenues by 59%. Our operating income and net profit almost tripled. We have achieved our guidance in all metrics with total orders close to EUR 500 million, revenues of EUR 429 million, a gross margin of 42% and an EBIT margin of 23%. Given the constrained global supply chains and logistics, our team did a fantastic job in achieving such an output and results. But behind all this is the strong demand growth from our customers, particularly driven by the volume ramp of gallium nitride-based power electronics. The demand growth is fueled by a broad base of application segments coming from the global megatrends of sustainability, electrification and digitization. We observed that in some areas, such as power electronics, compound semiconductors are moving from the role of being specialty and niche materials to become the workhorse in some of these segments of the semiconductor volume market. Compound semiconductors are a key technology for numerous areas as they are superior to the incumbent silicon-based semiconductor for many aspects. This will drive our growth on a sustainable basis. For 2022, we see a continuation of the strong order momentum throughout all our key markets. The demand remains balanced across the different applications. Overall, we expect a double-digit growth here again. Let me have a quick look at our Q4 performance, starting with our order intake. As in previous quarter, GaN power was again the strongest contributor to our order. Wireless and optical data communication, LEDs and lasers also had sizable contribution. In total, Q4 orders came in at EUR 120 million. Revenues in Q4 were at EUR 181 million, which is the highest level of the last 10 years, and we were able to meet customer demand. It is important to note that this shows that our manufacturing and supply chain are well equipped for further growth in the years to come. Gross margin in Q4 was 44% and EBIT margin, 32%, both being an expression of our profitable business model. So overall, we saw strong profitable growth in 2021, and we will continue to grow also during 2022 and beyond. I will explain the details of our new 2022 guidance to you later in this call. Before I hand over to Christian, I'm happy to announce that we will propose our shareholders to pay out a dividend of EUR 0.30 per share following this successful year. This proposal is subject to shareholder approval on our Virtual Annual General Meeting on May 25. This would represent a payout ratio of 35% of our group net results. Now I will be handing over to our CFO, Christian Danninger who will take you through the Q4 and full year 2021 financials. Christian?

Thanks, Felix, and hello to everyone. Before I start the review of financials, I'd like to take the opportunity to give you an update on our ESG performance and related activities. We regularly receive ESG ratings from rating agencies like ISS, MSCI, CDP or Sustainalytics. While all of our ratings are quite positive already, CDP has further raised our rating significantly by 4 levers from B2B and MSCI went up from BBB to A in 2021. You're also aware that we are a climate-neutral company already since 2019. To further push and accelerate our ESG agenda, we have recently upgraded our organizational setup in this area. We have established a new position of ESG and sustainability management reporting directly to me. To further document that we are committed to play a leading role in the field of ESG, we have today already reported new taxonomy aligned figures on a voluntary basis for 2021, which goes beyond the legal requirement to report EU taxonomy eligible figures only for '21. After detailed analysis and assessment process, we have set 57% of our revenue, so more than half, 39% of CapEx and 76% of OpEx to be EU taxonomy aligned and thus considered environmentally sustainable in the sense of the EU taxonomy regulation. At AIXTRON, OpEx is defined as the taxonomy regulation corresponds to the company's R&D experience. Therefore, we are particularly proud on the high results for the 2 key figures, OpEx and CapEx, which impressively documents the sustainability of AIXTRON's investment strategy, especially in research and development. Consequently, a further increase in environmentally sustainable, meaning green revenue in the next years is likely when the newly developed technologies move into broad adaptation. These taxonomy aligned technologies are wide-band-gap power semiconductors based on gallium nitride and silicon carbide as a key to energy-efficient power electronics, microLEDs for the next generation of displays. Lasers for data communication is a key technology for the digitalization of our world and some more. All these technologies have one thing in common. They are much more energy efficient compared to the current technologies available on the market and thus contribute significantly to the reduction of greenhouse gas emissions. Among many other benefits of these technologies, they significantly support the global efforts to mitigate climate change. For further details, I refer to slide 9 of our investor presentation and to our sustainability report 2021. Let me now continue with our income statement on slide 3. As Felix mentioned, total revenue for the year was EUR 429 million compared with EUR 269 million in 2020. This reflects almost 60% growth over the previous year. Revenues in quarter 4 2021, even grew by 67% year-on-year. The 2021 gross margin of 42% was 2 percentage points higher compared to the same period last year. In Q4 2021, gross margin was 44% compared to 42% a year ago. The difference is mainly due to higher share of products shipped with better margins in Q4 '21 versus Q4 of 2020. Operating expenses for the year increased from EUR 73 million in 2020 to EUR 83 million in 2021. The increase in annual operating expenses was mainly due to the following factors: firstly, we incurred higher variable compensation components, and we incurred onetime expenditures for the restructuring and the wind down of our PVA totaling to approximately EUR 3.9 million. With that, all cost of liquidation are provided for and no further costs are expected. Secondly, in the prior year, we had a positive onetime effect in our operating income of EUR 3 million. In Q4, 2021 operating expenses increased slightly to EUR 22 million compared to EUR 21 million in Q4 2020. SG&A expenses of EUR 35 million in '21 were EUR 8 million higher year-on-year mainly due to the factors I just mentioned. R&D expenses in 2021 remained roughly stable at EUR 57 million versus EUR 58 million in the same period last year. This reflects lower running costs for APEVA during the year, largely offset by increased expenses for the development and completion of our next-generation MOCVD equipment. In 2021, we recorded net operating income of EUR 10 million, which was below the EUR 30 million recorded a year before. This difference was mainly due to the other operating income of almost EUR 3 million in 2020, as mentioned before. Our 2021 EBIT was EUR 99 million at a margin of 23% versus an EBIT of EUR 35 million at a 13% margin in the prior year. This was mainly due to the year-on-year increase in revenues and with that the corresponding increase in gross profit. The 184% higher EBIT at 59% higher revenues in 2020, proves the strong operating leverage effect we have on higher revenues, translating over proportionately into bottom line earnings. In Q4 '21, we realized an EBIT of EUR 58 million at an EBIT margin of 32% for the quarter compared to EUR 25 million and 23% in Q4 2020, demonstrating the same effect. For the full year, we incurred total expenses of EUR 4 million at a tax rate of 4% compared to EUR 1 million tax expense at a tax rate of 2% in the prior year. In both years, we were able to utilize historical tax loss carryforwards and capitalize some additional deferred tax assets based on expected future profits. We generated a net profit of EUR 95 million in 2021 compared to EUR 35 million in the same period of 2020, primarily due to the discussed volume and margin effects. Per share, this means EUR 0.85 in '21 versus EUR 0.31 in 2020. Turning to the balance sheet on the next slide; inventories have risen to EUR 121 million from EUR 79 million at the end of 2020 in preparation for a further increase in business volume in 2022. Advanced payments received from customers increased to EUR 77 million from EUR 51 million at the end of 2020, which represents about 35% of order backlog. Trade receivables increased to EUR 81 million, mainly due to the very recent strong deliveries made in Q4 for which we expect to collect payments primarily in Q1 of this year. Our cash balance, including other financial assets and post our EUR 12 million dividend payment in May increased to EUR 352 million at the end of the year, some EUR 310 million at the end of 2020. Moving to our cash flow statement on slide 5; mainly due to the increase in net income for the year and the increased trade receivables at the balance sheet date, free cash flow for 2021 was EUR 49 million. In Q4 of '21, it was EUR 21 million. With that, let me hand you back over to Felix.

Thank you, Christian. Before concluding with the outlook for the rest of the year, I would now like to give you a quick update on the development in our addressed markets. In all our addressed end markets, we continue to see strong momentum. In 2021, our revenues in Power Electronics, which includes the material systems, GaN and silicon carbide mix doubled year-on-year. Also, revenues in optoelectronics, which included wireless and optical datacom, 3D sensing and compound solar almost doubled year-on-year. Our LED-related revenues went up by 39% compared to 2020. We see further growth potential in '22 and beyond as the demand for our technology is fueled by sustainability, electrification and digitization, all of which are global megatrend. In GaN power, we are at the beginning of a multiyear growth cycle. GaN-based power switches are being increasingly adopted for a widespread number of applications in the areas of IT infrastructure, renewable energy, data centers or white goods, just to name some examples. Please remember that some time ago we were only talking about fast chargers for cellphone. Some customers are now even telling us that their road maps have been pulled in by 2 to 3 years due to the acceleration of adoption. So overall, this market is developing very dynamically, and we are supporting large ad expansions of our existing customers while also supporting still new entrants to this industry. In silicon carbide power, we are very pleased about the development of orders having accelerated in the course of 2021 to representing 15% of equipment orders in Q4. And based on our current order pipeline, we expect this positive momentum to continue in '22. Our new silicon carbide epi tool, which is suitable for 6-inch and 8-inch wafers is getting great customer feedback. And even though it is still in development, we are already receiving sizable orders for it. This makes us confident that silicon carbon-based orders and revenues will already make a significant contribution to our business in '22, especially in the second half of the year as we continue to be in contact with all industry players. For LED applications, momentum also remained strong driven by the demand for red-orange-yellow LEDs, which are used in fine pitch displays, but also in horticulture applications such as indoor farm. In microLED, we are part of major development projects of large customer electronic players and LED specialists, such as HC SemiTek with whom we announced the collaboration yesterday. We get clear signals from customers that innovative displays of the next generation will all be based on microLED rather than OLED. This is very good news for us as our MOCVD epi tools are very well-positioned here and the same properties become relevant that make us so successful in GaN power and in later articles. Hence, we have decided to close down our older subsidiary APEVA. But this is good news as the alternatives also brings them into the display market, but with a much stronger position right from the beginning. We expect a growing contribution of microLEDs to our orders already during 2022 with shipments taking place late this year or in '23. You can see we enjoyed a very positive momentum from our addressed market. However, we continue to watch the development of the global supply situation very carefully, and we remain ready to take measures should it become necessary. With that, let me now present our '22 guidance on slide 6. First of all, it's very important to note that our guidance is based on our 2022 budget exchange rate of $1.20 to the euro. In the quarters to come, revenues and profit margins will be reported based on actual exchange rates which may differ from our budget. So for 2022, total orders received are expected to rise further year-on-year to a range between EUR 520 million and EUR 580 million from the EUR 497 million in 2021. With an opening backlog of EUR 217 million for '22 we expect revenues in the year in a range between EUR 450 million and EUR 500 million, growing further from the EUR 429 million that we had achieved in '21. We expect our gross margin to be around 41% and an EBIT margin in the range between 21% and 23%. This guidance includes our R&D spending from the completion of the development of our next-generation products as well as our activities to strengthen our organization in anticipation of further growth ahead of us. We have made our guidance based on the assumption that our business will not be impacted by any global crisis or pandemic. In summary, we are looking forward to see another growth year in '22 as the strong momentum driven by multiple end markets continue with the underlying trends being fully intact. And with that, I'll pass it back to Guido before we take questions.

Thank you very much, Felix and Christian. Operator, we will now take questions, please.

[Operator Instructions] The first question comes from Stephane Houri from ODDO BHF.

Yes. My first question would be about the guidance for the orders for 2022, which is strong. Could you share with us what will be the proportion of each of your key markets in your guidance, i.e., if silicon carbide will take a bigger share or if it will be still GaN related or even if microLED will take -- will start to take a share? And the second question is about the market share gains in silicon carbide. Just to know if you feel confident in gaining new significant customers or, let's say, incumbents already in 2022?

Thank you for your questions. So let me come to the first part. The rough order intake is split our anticipation for 2022. So while, of course, it's difficult to foresee in the future, we have a rough indication. We believe that in '22, order intake, again, will come roughly around to be from the power electronics domain. I would say maybe 2/3 gallium nitride, 1/3 silicon carbide, something like that, rough number. The other half of the order intake, I would expect from the optoelectronics business. And within the optoelectronics, I would expect a smaller portion from lasers and VCSELs, another smaller portion from datacom telecom, a reasonable portion from the LED and the remaining portion then from the LED world. And here, I would expect from the LED world maybe 50-50 between Fine Pitch and mini LEDs and 50% for microLED to give you a rough indication. So that was the first part of the question, giving you a rough split on the order intake, how it could break down. And now I come to the second part of your question on the silicon carbide and market share gain. I think at this point in time, we can say that we are working very closely together by now with 2 of the very large players in this market. And from 2 of the very large players in this market, we have received a very sizable order, and we expect throughout 2022, additional very sizable orders. And at the same time, we have been qualified or we have been chosen and are in the process of getting qualified from roughly 10 other customers in silicon carbide who I would not count into today's group of the top 5. But of course, all of them having the aspiration to rise into the top 10. We know how it is, right, in a competitive environment. Everybody wants to be among the top 5 and the top 10. So I think this is a pretty good pipeline of the overall market, given that we have been a new entrant in this market, and we are gradually gaining market share, and I see us on a good way forward.

Yes. Just to confirm what you've just said because my line was not so good. You've said that among the 2 -- among the key, let's say, players in the market, you have been qualified by 2, and you have received orders from one. Is that correct?

No, that's not correct. I said we are working closely together with 2 of these players. And from 2 of these players, we have received large orders. And from 2 of these large players, we expect to receive additional large orders in '22.

The next question comes from Olivia Honychurch from Jefferies.

I've actually got a couple. One is on microLED and the other is on your margin guidance. So on the microLED side, you said and it's very pleasing that the market should be adopting that technology quicker than you previously expected. And obviously, you've announced the contract with HC SemiTek yesterday. You've also just said on the call that you expect shipments to start from microLED systems at the end of this year. My question really is when exactly do you expect to receive commercial volume shipments for microLED? Is that something that we can think about happening as early as the end of this year or will that commercial level be more of a 2023 story? So that's the microLED question. And then I'll just quickly go ahead on the margin guidance. 41% gross margin for this year seems conservative given that you printed 42.3% last year. What's stopping your margins from growing this year? Because obviously, we've got to think about the fact that your product mix is becoming more favorable. And obviously, you're doing a lot of work on high productivity systems. So I'm just trying to get my head around what exactly stopping margins from going upwards this year.

Thank you very much, Olivia, for the question. I'll take the first one and Christian will take the second one. On the microLEDs, we expected the volume ramp to be starting towards the end of 2022, sometime in the fourth quarter and then to come with along -- throughout the whole year of 2023 and continue in '24. So the starting point, I would put somewhere in the fourth quarter of this year. And then here, we talk about commercial volumes, not an R&D system, but sizable commercial volume. I hope that answers your question. And Christian, maybe you take the margin topic.

Yes. The margin topic, of course, has 2 aspects. I mean, the gross margin, as you see, is yes, we keep it quite consistent. I mean there's always a product mix affecting the -- there's always FX effect in there, not 100% easy to really predict precisely on an EBIT margin perspective. We could be able to squeeze up more, but we are also, on the other side, very committed to keep our R&D spend high, and that limits a little bit maybe the translation into EBIT. But as you see, it is quite consistent with the last year. And we deem the investment in turn to R&D to be the best investment possible. That's why we continue keeping that at a high rate.

Let me build on what Christian said with respect to the gross margin. Olivia, you also asked about our product mix, yes, for sure, the new products come with a much higher productivity, which reflects the margins. Of course, we continue to run also some of our older products. I think within either Q1 or Q2, there will be one quarter where the product mix will still be largely comprised of some older products. So meaning a lower gross margin, yes. So across the year, that will still be based on product mix, as I think everybody is used to from AIXTRON, quite some fluctuation. But the overall trend that our new products deliver higher or significantly higher gross margin, that remains intact.

The next question comes from Uwe Schupp from Deutsche Bank.

Two for me as well. Firstly, a follow-up on the microLED. What products really should consumers and should we expect to see in shelves first in terms of commercial products? I think in the past you indicated that on the very -- on the smaller display sizes, it would be more on the smart watches side of things and on the upper end, it would be high-end televisions. Is that still the case or do you see a change here in the potential applications? And secondly, Christian, can you update us on your foreign exchange exposure? I'm just trying to read that guidance and that margin guidance, in particular with the budget rate of the EUR 120 million that you have been alluding to?

Uwe, yes, good question. So the guidance we had given about the initial product for microLED is still fully intact. So we, in fact, anticipate the first product to be smart watches and then also high-end televisions. And then at a later stage and smartphones, AR/VR glasses, laptop displays and maybe in medium-sized or large but not gigantic sized television gradually step-by-step coming in. Yes, it will be a multiyear road map of different types of displays.

And sorry, Felix, it's very helpful. Just the evergreen question that I think we have to ask on every conference call of the big microLED projects that you are seeing across the globe, do you believe that you are part of them in 80%, 90% higher?

I think the exact quantification would be dangerous in this displays. I say that with a smile because I think many of the big consumer electronics players will try to run the project in a stealth mode, and we might not see all of them, but I would clearly expect that we are part of many, many, many of these projects, given that we work with quite a sizable numbers of consumer electronics players together in large collaboration projects.

Okay. And then I'm happy to give you some insights here on our U.S. dollar exposure. Historically, we run at a U.S. dollar share in sales of between 30% to 40%. That is always fluctuating a little bit. It has been decreasing, but that's about the range. And I mean, consequently, as the U.S. dollar became stronger, we also changed the rate to EUR 120. Recently, it's much more favorable. And with that, I think you can run your numbers and quantify what the potential upside would be.

That's very helpful. And basically, your cost exposure is still virtually 100% in euros. Is that correct?

Yes, 100% is -- I would not confirm 100%, but it's minor.

The next question comes from Charlotte Friedrichs from Berenberg.

The first one would be around the quarterly phasing, both for the order intake and also the shipments. So are you already seeing an uplift here in order intake in the first couple of months of the year now? And on the shipment side, should we expect again a year where shipments are largely geared towards the fourth quarter or is it going to be a little bit more even this time around? And then the second question would be on your cost development and procurement. Are you seeing any significant pressure here from input cost inflation or difficulty to pursue certain components?

Yes. Thank you. First question, order intake and revenue split across the quarters of the year. I think order intake is always a bit difficult to forecast when exactly is the customer placing the orders, the dateline of an exact quarter is a bit arbitrary. So I would say let's get started with the assumption of an even order intake and let's be ready for some surprises around that. So I wouldn't get more -- want to get more concrete. I think on the revenue side, we are not expecting to see such an extreme and pronounced peak towards the fourth quarter. That is what we are not expecting. Nevertheless, we would see a bit softer in the first half of the year and then a bit stronger towards the second Q3 and Q4. It is -- I mean, I take the midpoint of our guidance, and I take the whatever, a couple of million down for the first 2 quarters and a couple of millions up on the second 2 quarters, if you know what I mean by that, yes. So it's not that we start with whatever, 15% of revenues in the first quarter and end up with, I don't know, 65% of revenues in the fourth quarter as we did in 2021, yes. So I hope that answers your question a bit less in the first half, a bit more in the second half of the year. If I come to the second part of your question, cost of procurement and also limitations of supply chain, if I got your question right, we -- our supply chain is very well capable of keeping up with the growth and with the demand. We, of course, work very closely with our suppliers. We prepare them for the orders where needed, so to say, we support them and very actively secure and make sure that the supply capacities are given. So we do not bottlenecks or risks that would block us from realizing the guidance that we have given. In terms of cost, in some aspects, we are expecting the cost, the procured input quantities to go up. However, our business is a very long-term forward-looking business. So the purchase contract for the material that we need for the 2022 revenues have already been closed or have been quoted. So we do not see in the year 2022 cost increases, yes. So the guidance and all these elements that we've put out in terms of financials, you could say are based on the 2021 cost level. And then for 2023, yes, for sure, we will see a certain amount of cost increases, but we also expect to be able to pass on part of those cost increases depends on which elements to our customer.

Understood. And then a follow-up, if I may. If I heard correctly, you said in the beginning in the prepared remarks that in your order intake in the fourth quarter, about 15% was from silicon carbide. Did I hear that correctly? And can you maybe give us the contribution of the other end markets?

In the fourth quarter of '21, which just passed, let me have a look here. Yes, it was a silicon carbide for a sizable amount. I think we then had about a quarter GaN power. I think we still then had quite sizable telecom optical data communication. And we also had quite sizable microLEDs and quite sizable fine pitch displays. Let's put them all on an equal level.

And the next question comes from Jurgen Wagner from Stifel Europe.

What is the split of your equipment order backlog? I mean, amongst the products you just mentioned and a follow-up on your microLED comments earlier, how much microLED orders are in your order guidance for '22?

So for the split of the backlog, I can only give you a rough indication. Let me have -- let me think how we can derive that. I think for the split of order backlog, honestly, I don't have the numbers with me, and it would not be serious to give you an indication. Yes, so let's come to the second part of your question. That was, please help me.

I mean you talked about microLED that you expect the inflection or commercial inflection in Q4. How much orders are in your order intake outlook for the current year?

I think for the current year 2022, I mentioned that about half of our order intake we are expecting to be from the optoelectronics side. And out of this, for the microLEDs, it could be around one third.

And there is one follow-up question from Olivia Honychurch from Jefferies. Or maybe this was a mistake, Ms. Honychurch? Okay. A follow up question from Stephane Houri from ODDO BHF. Mr. Houri, Your line is open. Okay. No questions. There are no further questions.

Okay. Then with that -- I think could there be another one coming? The microphone is unmute?

Is there a technical problem or is there no more questions?

Let me check. Maybe there's a question from Janardan Menon from Jefferies.

I just wanted to follow up actually on the microLED question. Just want to know, are you -- is your order momentum for '20, which you saw last year and through 2022. Is that from one customer who is going to start commercializing in 2020 by the end of this year or is the commercialization quite broad and you're seeing quite a few customers reaching commercialization point at the same time, and they will start commercializing from the end of this year?

That's a very good question. As mentioned before, we are working together with multiple customers and the orders we have received in '21 in the past year were also coming from multiple customers. I mentioned that one. We are aware of the one customer starting with a very concrete plan, which I was mentioning. I think other customers are in the preparation, and I would expect them to kick in throughout 2023. But the concrete end of this year with one concrete cloud customer that I had in mind when answering the question.

Understood. And then just going back to your silicon carbide question, I mean, answer, just to clarify. So are you saying that you are working closely with 2 customers and 2 large customers who will convert to volume orders this year, but you have already got orders from 2 large customers, so it's 2 plus 2 is 4 totally of the large sort of incumbent players. Is that the correct way to understand this? And the 2 that you've already got orders, does that include the -- your traditional big customer in North America? Is that already included in that number?

So I mentioned that we have received volume orders from 2 customers, 2 of the very big ones, yes, and we expect further orders. So with those, it's a big revenue ramp ongoing. And I also mentioned that we are closely working and have received orders and also expect to receive further orders with roughly 10 other customers. So we are getting into a broad adoption of our tool into the market and this is continuing 2022, but of course, then gaining further momentum in 2023. So it's a very good moment for us to gain market share.

And the 2 large customers -- the 2 large customers, you already had one already, if I'm right. So you've added one more into a firm order category. Is that the correct way to think about it?

Absolutely.

Okay. Thank you very much to the audience, listeners and questions. With this, we would like to close today's call. Thank you, as I said, for attending. Our next earnings call will be our first quarter '22 results that will be on May 5. And in May also, we will have our AGM and I hope that all our investors will participate and cast their vote. Thank you very much, and bye-bye.