AIXTRON SE (AIXA) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to AIXTRON's conference call regarding the Q3 2022 results. [Operator Instructions] Now I hand over to Guido Pickert, VP, Investor Relations and Corporate Communications at AIXTRON.

Thank you very much. Welcome to AIXTRON's presentation of our Q3 and 9 months '22 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 and is considered copyright material. As such, it cannot be recorded or rebroadcast without permission. Your participation in this call implies your content 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 in the 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 our CEO for opening remarks. Felix?

Thank you, Guido. Let me also welcome you all to our results presentation. I will start with an overview of the highlights of the quarter and then hand over to Christian for more details on our financial figures. Finally, I will give you an update on the development of our business and our guidance. Let me start by giving you an overview of the key business developments in Q3 on Slide 2. Demand for our equipment remained strong with an order intake of EUR 143 million, up 25% year-on-year, driven by the strength of the growth markets our customers are operating in. The biggest demand drivers for the quarter are our systems for silicon carbide and gallium nitride power electronics. The single biggest contribution to orders in Q3 '22 already came from our newly introduced silicon carbide multi-wafer system. This is very encouraging as we have just recently launched our brand-new next-generation silicon carbide system, G10-SiC, which our customers are already ordering in volume. Orders for tools to produce opto-electronics as well as tools to produce LEDs, including micro-LED also remained strong. As a result of all that, we can report a very strong order backlog of EUR 369 million, up 38% year-on-year. Our quarterly revenues are affected by some temporary circumstances, which are mainly due to a few customer-related delivery delays and the granting of export licenses, which were not yet available as of the reporting date. As we have stated during our Q2 results call, we expected our product mix to improve for the remainder of the year compared to the first half of '22. As a result of that, our gross margin improved up to 44%. Now I will hand you over to our CFO, Christian Danninger. He will take you through the Q3 '22 financials. Christian?

Thanks, Felix, and hello to everyone. Let me start with the financial highlights of our income statement on Slide 3. As Felix mentioned, orders in the quarter continued to be strong, and our backlog was up, fueled by the mentioned strength in demand. Revenues were at EUR 89 million, gross profit at EUR 39 million, EBIT at EUR 16 million and net profit was EUR 19 million for the quarter, which is below prior year, mainly due to the mentioned temporary effects, resulting in a shift of some tool deliveries to Q4. Gross margin improved to 44% from 43%, as mentioned. OpEx in the quarter went up to EUR 23 million, predominantly driven by higher variable compensation elements combined with slightly higher R&D spending. We again utilized tax loss carryforwards and capitalized some additional deferred tax assets in the amount of EUR 9.4 million due to expected future profits. We expect to realize exceptionally high shipments in Q4, and therefore, revenues, gross profit, EBIT and net profit at a corresponding high level, enabling us to reach our upgraded guidance for 2022. Now to our balance sheet on Slide 4. The previously mentioned shifted tool shipments and the inventory buildup to prepare for higher expected -- for the higher expected business volumes resulted in inventories at the end of September in the amount of EUR 209 million. The advanced payments received from customers we had on our books at quarter end were EUR 122 million, representing about 33% of our order backlog. This led to total cash balance, including other financial assets of EUR 339 million. Out of this, EUR 200 million were invested into funds following a very conservative diversification approach. Just a quick word on our free cash flow on the next slide before I turn back to Felix. Free cash flow in the third quarter was negative EUR 7 million, which was up 61% compared to last year's level. With that, let me hand you back over to Felix. Felix?

Thank you, Christian. Before giving you our updated view on the outlook for the remainder of the year, I would like to share some highlights of our market development. The order momentum in most of our addressed end markets remain very healthy. In the area of power electronics, based on the material system of gallium nitride and silicon carbide, the momentum continues to be strong, in particular for our silicon carbide technology solutions. Here, we can report very encouraging figures for this quarter, underlining that our strategy for our silicon carbide business is unfolding very well. We believe that our recently launched G10-SiC is the right tool at the right time. This fully automated multi-wafer batch tool processes 9 6-inch wafers or 6 8-inch wafers per process, enabling our customers to produce their wafers at the lowest cost in the market today. Today, most customers are still running the main volume of their production lines on 6-inch wafer side, but nearly all of them have a well-defined roadmap towards 8-inch prepared. Our new tool, G10-SiC addresses this market need, and we are more than happy with the customer feedback and the orders we had received within the first quarter of the launch. At this point in time, we are demonstrating the new system to further customers in order to convince market participants who are not yet using our system. The main driver for silicon carbide power devices remain electromobility with use cases in the main inverter, the onboard charger and in fast charging pools on the road side. In addition, we see more and more customers investigate higher voltage silicon carbide devices at 3-kilovolt and 10 kilovolt, which are going into the very high-power applications in green electricity generation, such as large wind and large solar power plant. In the market for gallium nitride power, we observe continued strong momentum. This segment was the second largest contributor to order intake in Q3 '22. We continue to see additional customers in the area of power electronics, enhancing the portfolio by GaN power devices. This is driven to a large part by the tremendous potential of GaN power devices to increase the efficiency of synergy conversion. The combination of rising energy prices and increasing awareness for energy savings and going to net 0 continues to be the main driver here. In the area of micro-LEDs, we see more and more players from the display industry, from the LED industry and from consumer electronics starting projects. We expect to ship first volume orders in '23 into 1 or 2 application segments with other segments following at a later stage. Eventually, we will see micro-LED displays penetrate the complete display space, ranging from TVs, notebooks or smartphones, all the way to automotive and large signage displays. Finally, I would like to give you an update on the portfolio renewal that we are working on for a while. The G10 silicon carbide is the first member of the new series family that we are launching. Also for GaN power electronics and for gallium arsenide lasers and micro-LED, we have new family members in the making. We are planning to launch both of them in the first half of 2023. Today, these products are in the validation at multiple beta customers. And both of them deliver very promising results in all the target applications that we have in mind. With that, let me now give you the update on our full year guidance for 2022 on Slide 6. As indicated before, the shift of some tool shipments from Q3 to Q4 '22 will lead to exceptionally high shipments in the last quarter of this year, resulting in a record level of quarterly revenues. Based on this and the strong customer demand, we upgrade our original full year 2022 guidance. Orders are now expected to come in between EUR 540 million and EUR 600 million from previously EUR 520 million to EUR 580 million. We leave our revenue expectation unchanged at a range between EUR 450 million to EUR 500 million. The 2022 gross margin, we expect to be around 42% compared to 41% before. We expect our EBIT margin to be now between 22% and 24% from 21% to 23% before. As before, these expectations for 2022 are subject to the provision that the challenges of the current environment will not have significant impact on the development of our business. 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] First question comes from Michael Kuhn from Deutsche Bank.

A few questions on a complex topic, and that is the delivery and sales delays that you saw in the third quarter. Firstly, you mentioned some customer [Technical Difficulty].

We just lose the connection. Just a moment please. And we don't have him in the line anymore. So just we go to the next question. And next up is Olivia Honychurch from Jefferies.

Two from me, if that's okay. So firstly, on the silicon carbide side, it sounds like you're making very good traction here, and that's obviously partly being led by your new tool. You said that a large part of your order intake is coming from this segment. Can I ask, is that coming mostly from existing customers like Wolfspeed and your second big customer here? Or have you been able to sign up new customers just for your silicon carbide tool in the quarter? And then I've got a follow-up as well.

Thank you very much. Very good question. Yes, in fact, with our new silicon carbide tools, we have been able to register orders both from existing customers and new customers. It's a good and solid mix, and we can confirm that with this tool, but overall, we continue to make inroads in the silicon-carbide market by broadening and further expanding our customer base. And that makes us very positive also for further growth out of this segment.

Great. That's good to hear on the new customer side. I mean, can you give us any color on who the customers might be in terms of geography or potential size or how they could fare in terms of order tools and size versus your existing customers on silicon carbide?

The new customers are very, very broad in geography. Some is in Europe, some is in Korea, some is in Taiwan, some is in China, some of it in the U.S. We are making good progress, I would say, worldwide.

Okay. That's good to hear. And finally, my second question was on the export licenses. This may have been what the previous question was going to be about. You said that you didn't have these in time for the end of Q3. Can I ask if you've received them since the end of the quarter? And if not, then when would you expect this to come through? And I guess, separately, as a follow-on from that, what risk is there that these issues keep popping up in future quarters, you see shipment delays coming through because of export license issues?

Very good question. No, we have not received the particular export licenses that were the root cause of the pushouts from Q3 into Q4. So they have not arrived yet. However, we expect them to come, yes, in the next weeks. I don't know when exactly it's going to be. And also relating to your question, is there a risk of further push out, this is what we have reflected in the lower end of our order guidance, which we have not increased, but [ in our results we repeat ] -- revenue guidance, which we have not increased, as we might have in order to fully, say, reflect that risk. The pattern is that we see that export licenses these days take a bit longer. One of the root causes is that we see that the authorities are very busy. They also have been tasked with additional topics such as distributing funding in the sector of green energy and so on. So it's a capacity and bandwidth topic, one of them. Other topics is a deeper scrutiny that we all see and observed on individual customers, and that is what we have reflected. And we don't see an overall risk here, but it's a timing topic that needs to be taken into account, and we have done that. It's fully reflected in our number.

Now we have from Michael Kuhn from Deutsche Bank back in the line.

So as a follow-up on the export licenses, you just spoke about it. Do you expect those, let's say, granting bottlenecks to be soft at some point? So let's say, more civil servants working on the topic, or could that be something permanent? And also, in that context, obviously, the U.S. is tightening rules of technology, shipments to China. Do you see an impact on your business currently or medium term? So do you see any pattern changes in that area? And maybe on the customer and related delays, again, I'm not sure whether this was answered already. Is that more technical reasons? Or what was the reason for those delays?

So let me try to take your question one by one. I think the first question is whether we expect that the bottlenecks will be solved at some point. I think what I mentioned before is that we understand that the additional tasks have been put on the authorities. I don't know what the plans of the government are to start it up. I think we are preparing now for the topic to remain for a while. So at some point, we will get the licenses that we have now been waiting for, then we will wait for others, but we don't -- I think it's a manageable topic. It's just the lead time topic that we will take into account. So we don't expect here a fundamental issue or like a substantial topic. That's my comment to the first one. The second question, you're relating is with respect to the new U.S. regulations. We have, of course, looked into these new U.S. regulations in all depths in all details. And we did that actually with the support of very experienced U.S. subject matter experts to make sure that the conclusions we are drawing is correct. And it's very clear based on that, that these rules and regulations are targeting the segments of AI and supercomputing, not the segment we are in. Our market segment is not affected. But even if we were a U.S.-based company, we would not have any effects or rules on this one. Also we have checked, none of our active customers is on this expanded entity list. And hence, we do not expect and also it does not have any implications on our supply chains for U.S.-based parts that, of course, we are using some of them in our tools. So we do not see that this changes our current business behavior. Does that address your question?

It does, indeed. And on the customer-related pushouts, you want to phrase it?

Yes. On the customer-related pushouts, we had the effect that in one particular market segment, this was the segment -- consumer-driven segment of red-orange-yellow LEDs. We had some customers push out orders, which was of course due to the overall weakening in this market segment. That was the reason for the customer topic on this one. We do not expect that that's going to go around across the whole market.

All right. And then maybe one more question on the more financial side. You've obviously built up quite a lot of inventory over the past 9 months. Can you quantify roughly what amount of working capital relief you expect for the fourth quarter?

Yes. Christian here. I cannot give you the exact number, but we surely expect our inventories to go back to just the run rate we had before, which just -- this buildup here of inventory in the quarter is purely driven by this pushout shipments from Q3 to Q4, yes. And it's also correlating with the received down payments. So that will be basically resolved by the end of the year.

And we are preparing, as we said before, for our relationships, record high shipments in the fourth quarter. So I think at the end of the fourth quarter, a tremendous amount of this inventory will leave our company and convert into revenues. Very clear, absolutely.

Then very last question, promise. On the micro-LED side, if I understood you correctly, recent business was not just about your big launch customer, but also other customers, but that is not yet volume business. Is that correct?

Yes. Thank you very much. We see the market at large preparing for the micro-LED topic. We are currently working with a very large number of customers together. We see interest both coming from display makers, from people who were formerly engaged in LEDs, but even also the very big consumer electronics giant, everybody is working currently on micro-LED. As you rightfully say, the majority of these players still in the stage of development, some of them pilot line production and one of them already preparing now for a volume ramp next year. The others, I would say, in a slightly earlier stage.

And the next question comes from David O'Connor from BNP Paribas.

Maybe firstly, just a clarification on the license. Can you, Felix, just confirm it's the German government that you're seeking this license from this export license? And to which geography are you shipping these tools into?