AIXTRON SE (AIXA) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to AIXTRON's Analyst Conference Call Q1 2025. Please note that today's call is being recorded. Let me now hand you over to Mr. Christian Ludwig, Vice President, Investor Relations and Corporate Communications at AIXTRON for opening remarks and introductions.

Thanks very much, operator. A warm welcome to AIXTRON's Q1 2025 Results Call. My name is Christian Ludwig. I am the Head of Investor Relations and Corporate Communications at AIXTRON. With me in the room today are our CEO, Dr. Felix Grawert; and our CFO, Dr. Christian Danninger, who will guide you through today's presentation and then take your questions. 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 consent to this recording. Please take note of the disclaimer that you find on Page 2 of the presentation, as it applies throughout the conference call. This call is not being immediately presented via webcast or any other [ means ]. However, we will place a transcript on our website at some point after the call. I would now like to hand you over to our CEO for his opening remarks. Felix, the floor is yours.

Thank you, Christian. Let me also welcome you all to our Q1 '25 results presentation. I will start with an overview of the highlights of the quarter and then hand over to our CFO, 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 update on the key business developments of the second quarter on Slide 2. The important messages for Q1 are: we have delivered a robust Q1 '25 in a weak market environment and recognized solid new orders of EUR 132 million, which lead to an increase in equipment order backlog to EUR 308 million. We concluded the quarter with revenues of EUR 113 million. With that, we have even exceeded our guided range of EUR 90 million to EUR 110 million. The gross margin came out at 30%, mainly due to a EUR 5 million one-off cost item related to our announced personnel reduction. Adjusted for this effect, the gross margin is at around 35%, slightly below the previous year's 37%. Reasons are a slightly weaker product mix, as well as selected product enhancements of previously delivered G10 series tools. With these results, we confirm our full year 2025 guidance published in February '25. And let me now also add our view on the U.S. tariff policies. Although as of today, our tools are exempt of any tariffs, we are aware that this may change. And we are able to manufacture both in Continental Europe, namely in Germany, as well as in the U.K. This gives us some options to deal with different tariff scenarios. We will closely monitor the impact of the U.S. tariff policies on the global economy and any required measures, which may become important for us. Christian will now provide a detailed look into our financials on the following pages before I take over with an update on our markets. Christian?

Thanks, Felix, and hello to everyone. Let me start with the highlights of our revenue development on Slide 3. We had a good quarter in a weak market environment with revenues at EUR 113 million, only down 5% compared to the EUR 118 million last year. We even came out slightly above the upper end of the quarterly guidance range of EUR 90 million to EUR 100 million. A breakdown per application shows that 69% of equipment revenues come from GaN and SiC power, 17% from LED, and 10% from optoelectronics, and a 4% contribution from R&D tools. The aftersales business well contributed to total revenues with EUR 25 million. The aftersales share of revenues grew to 22%, up from 21% a year ago. Now let's take a closer look at the financial KPIs of the income statement on Slide 3. I already talked about the revenue line. Gross profit in Q1 2025 was EUR 34 million. That implies that our gross margin in Q1 decreased by 7 percentage points versus Q1 2024 to 30%. But please recall, this includes the one-off expense of around EUR 5 million in connection with the announced personnel reduction in the operations area. Adjusted for this effect, the gross margin is only slightly below the previous year, at around 35%. The 2 percentage points decline is mainly due to a slightly weaker product mix, as well as selected product enhancements to previously delivered G10 series tools. The personnel reduction measure is planned to be completed in Q2 and will result in an annualized improvement of around EUR 5 million. This cost reduction will be largely effective in Q2 and fully effective from Q3 2025 onwards on a pro rata basis. Please note that we will see the effects in the headcount figures slightly later than the cost effects due to the notice period of the affected employees. OpEx in the quarter went down to EUR 31 million, primarily driven by lower R&D spending compared to the previous year. For the full year, we expect R&D costs to be slightly lower than in 2024. Please do not take the Q1 number as a run rate for the next quarters. EBIT for the quarter was EUR 3 million. Again, the decline in the operating result compared to the previous year is mainly due to the lower gross profit as a result of the one-off expenses for the personnel reduction. Now to our key balance sheet indicators on Slide 5. Working capital was down by more than EUR 30 million since end of 2024. Several balance sheet items contributed here. We continue to decrease inventories to now EUR 353 million compared to EUR 369 million at the end of '24. And as stated before, we expect further inventory reductions to materialize throughout 2025. Trade receivables at the end of March were at EUR 134 million, compared to EUR 193 million at the end of '24. The reduction versus year-end is mainly the result of the collection of the payments related to the large shipments in the last quarter of 2024. Advance payments received from customers at quarter end were EUR 51 million, down about EUR 30 million from end of 2024, primarily driven by some cutoff date effects and some regional shifts in the order book. Advance payments represent about 17% of order backlog. The fourth key element of working capital, trade payables, has now come down to EUR 21 million from EUR 34 million at the end of 2024. This well reflects now the fully adjusted supply chain situation, with significantly reduced purchasing levels. Adding it all up, our operating cash flow improved in Q1 to EUR 35 million, a strong improvement of more than EUR 42 million versus last year's negative EUR 7 million. On the back of the improvement in operating cash flow, free cash flow improved even more. It came in at EUR 30 million, compared to negative EUR 33 million last year. The improvement was even more pronounced as our CapEx in Q1 at EUR 5 million was significantly lower than last year's number of EUR 26 million. This is, of course, primarily due to the now completed investment in the Innovation Center. Our cash balance, including other current financial assets, as of the end of the quarter increased accordingly to EUR 93 million compared to EUR 65 million at the end of December 2024. As stated before, our top priority for the use of cash will continue to be the implementation of our strategy. We will apply core competencies and abilities to markets with high growth differentiation and margin potential in order to sustainably increase the value of the company. And with that, let me hand you back over to Felix.

Thank you, Christian. I would like to continue on Slide 6 and give you an update on key trends in our different markets. There is not much news from the SiC and GaN market since our previous call. Hence, I will keep this very short. But there are quite some interesting developments in our opto business, which I would like to address before moving to our expectations for '25. First, a very short update on SiC and GaN power electronics. The recent developments in the electric vehicle market have led to a short-term slowdown in SiC capacity expansions. Customers in the Western world have idle capacities, and we all have heard news about customers even reducing 6-inch capacity and even [ scrapping ] tools. In China, our customers continue investing, and we had strong shipments and strong order intake for the G10 SiC into China in Q1 and expect more in Q2. Midterm, we expect further growth for SiC power devices and hence for SiC deposition equipment worldwide. Silicon carbide wafer prices have come down significantly, and this will result in an even higher competitiveness of silicon carbide devices when compared with silicon IGBTs. Now let's turn to GaN. In the Western world, we have observed a slowdown in demand for gallium nitride equipment as well. Again, we remain bullish as for the midterm prospects in this segment because more and more applications are addressed by gallium nitride devices, as we have indicated in recent earnings calls throughout the second half of '24. In China, many GaN customers nevertheless continue investing also in 2025. We expect strong orders in 2025 for gallium nitride from our China customers. Overall, for both GaN and SiC, our demand in 2025 is expected to be roughly flat compared to 2024. Sales is driven mainly by our Asian and, in particular, by our China customer base, while European and U.S. demand is much slower this year. Let me now come to optoelectronics. In optoelectronics, we are observing an increasing demand for MOCVD tools and data communication applications. We anticipate to generate roughly 20% of our equipment revenues this year for this business segment, with the majority coming from telecom and datacom sectors. We anticipate strong demand to continue in 2026 and to grow even bigger volumes in the coming years, driven by 3 factors: first, the appetite for data fueled by 5G sensing and AI is causing bandwidth requirements to double approximately every 2 years in transport networks. In hyperscale data centers, AI demands are pushing for even higher bandwidth, leading to increased demand for 800-gig 1.6 [ terahertz ] optical interconnects. This is driving new investment in optical infrastructure. Second, we observe a growing preference of customers for photonic integrated circuits called PICs, P-I-Cs, over traditional discrete lasers. PICs integrate all lasers, modulators, and detectors onto a single circuit, offering higher performance, a smaller form factor, and significantly lower energy consumption compared to traditional laser circuits. The PIC market is projected to reach $41 billion by 2031, reflecting an annual growth rate of about 16%. Third, the integration of more than 100 elements in some PICs is shifting manufacturing requirements. At the epitaxy level, all devices must adhere to narrow specifications throughout all epi steps, both on wafer and from campaign to campaign. At the manufacturing level, this integration and increased volume necessitate more precise backend manufacturing, driving the adoption of 150-millimeter indium phosphide substrates compared to the prevalent 100-millimeter, which was used in the past. Our AIXTRON G10-AsP tool was exactly developed with these new requirements in mind and is either already qualified or in qualification at all leading laser suppliers. The tool benefits from several major improvements compared to the previous G4 generation. We are using a 4-flow injector, which is delivering a 3x to 4x better uniformity compared to the previous generation. It is the first arsenic phosphide MOCVD reactor with in-situ cleaning, which is a game changer for our indium phosphide laser customers. It enables them to simply reset the reactor when changing process recipes and, for example, foundries, which do contract runs for different customers, and they do a batch for one customer and the batch for another customer in the next run. Last but not least, 6-inch indium phosphide substrates are very brittle and our cassette-to-cassette solution developed and matured on our G10 SiC and G10 GaN is now completing the G10-AsP solution. Wafers are loaded and unloaded directly into the wafer cassettes without it requiring any manual operator handling. This increases manufacturing yield and enhances the customers' manufacturing line productivity. These advantages reinforce our undisputed market leadership in the opto sector. Our recent success with Nokia for the G10-AsP tool highlights our strong position in this segment. Additionally, we have received first orders from a leading global supplier of AI-related applications, and we expect more to come soon. You will hear more from the press releases in the next weeks and months. With this, let me come to an update on our Innovation Center. You recall that the 300-millimeter opportunity is the reason why we decided to invest in our additional 300-millimeter cleanroom, the Innovation Center, displayed on Page 10 of the slides. With an investment volume of around EUR 100 million, the construction project was completed in record time, just 15 months from the groundbreaking ceremony to commissioning the first installed 300-millimeter deposition system. The next milestone was reached just now in the first quarter. The first 300-millimeter wafer was processed, and the Innovation Center was put into full operation for 300-millimeter gallium nitride as [ development topics ]. So the Innovation Center project from our side is completed, and now we have handed this over to our development team. With that, let me now move to our guidance. We confirm our guidance for 2025 as published in February. We expect revenues to come in at a range of EUR 530 million to EUR 600 million. At the midpoint, this would be around 10% below '24. We expect a gross margin of 42% to 41%, so at around last year's level, and an EBIT margin between 18% and 22%. The guidance for the gross margin and EBIT margin includes one-off expenses of around EUR 5 million in relation to the announced personnel reduction in the operations area. The measure will lead to annualized savings in the mid-single-digit euro range in the future, which corresponds to an improvement in the gross margin and EBIT margin of around 1 percentage point. For Q2 '25, we expect revenues in the range of around EUR 120 million to EUR 140 million. Again, as stated before, the implications of the U.S. tariff policies are unclear. As of today, our tools are exempt of any tariffs, but we are well aware that this may change. We will closely monitor the impact of the U.S. tariff policies on the global economy and any required measures in order to find the best solutions for our customers and other stakeholders. With that, I will pass it back to Christian before we take questions.

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

[Operator Instructions] First up is Martin Marandon from ODDO BHF.

My first question is about the order intake. Maybe could you give us a bit more color on what exactly drove the solid order intake in Q1? I know you mentioned customers from Asia for power application in the press release and also photonics during the call. But I was wondering if it was more photonics than silicon carbide or gallium nitride, maybe, which drove the surprise? And also if it concerns a broad range of customers or a small number of customers?

Yes. Thank you very much. So order intake in Q1 was, in fact, a very big part with silicon carbide, almost 50%. And that one was followed, I think, by 20% by the optoelectronics, which we mentioned. So this is the 2 main segments and the rest is then split across the other applications. And what I also mentioned is China was very big in the Q1 in terms of order intake, I think, if I recall right, followed by some order intake from Japan, also silicon carbide quite strongly, and then I think the rest was split across the whole rest of world to give you a rough flavor and rough indication. And the rest of world is especially the laser systems. We all know in the laser world, it's not volume and bulk orders, power electronics, of course, big volumes, many, many wafers, many tools typically on one order, while the laser is typically 1, 2, 3 tools per order, however, a much broader, much more diverse customer base.

And maybe in the laser segment, you mentioned the transition to 800 gigabytes, et cetera. But I was also wondering if co-packaged optics and so on, we see more and more in the next NVIDIA GPUs has an effect on MOCVD demand at the moment.

I didn't get the question about the co-packaged, sorry, I couldn't fully understand.

Yes. I was wondering about this new co-packaged optics, and we tried to put photonics chips directly on the packaging of AI chips. If that was driving some kind of also MOCVD demand for AIXTRON as well, or if it was mostly what you mentioned, so 800 gigabytes transition, et cetera.

Yes. Thank you. I think it's a very good question. I think we expect to see a very gradual transition. So the first transition, which I mentioned also in my prepared notes, is a transition from 4-inch to 6-inch and essentially from discrete laser devices and modulators and so on now to the integrated devices. That's the first step. So now essentially, you have an indium phosphide-based integrated photonics chip, this PIC, photonic integrated circuit, which is being used. And I think today's system to a large part are still using discrete architectures. So you have, let's say, photonics IC, and separately you have the other ICs of your system. But very clearly, going towards the future, we will see more and more co-integration of that in a package. For example, a PIC in the package, co-packaged with a GPU, CPU, and memory and so on, all on a silicon interposer or potentially there's some work ongoing on a glass interposer where very easily you can also form waveguides. So I think it's a gradual transition. But as you indicate, the overall role of optics in the AI and in the data center space is increasing. And by the way, also of power electronics, I think same kind of topic. We see power electronics today as, let's say, very separate element. And step-by-step, they will be integrated. So in the end, and it's a transition which will span multiple years, as a road map, we have seen roadmaps of some of our customers. In the end, you will see a fully integrated package on an interposer no longer like a PCB, but advanced materials, be it either silicon or glass or sapphire where in the end, the optics for the data exchange and the power electronics for the power supplies is being fully integrated. It's an exciting road map.

And the last one, if I may. It's a quick one, it's maybe one for Christian. Just on cost. I was a bit surprised by the increase of SG&A cost in Q1. Just wondering if there was a specific effect that we should be aware of.

Let me try to give you a high-level summary of what happened there. In the selling expenses, we saw an increase, which is related to a little bit of a sharpening of our disclosure. That means in the past, all customer-related lab services were disclosed in the R&D expenses. And now we disclose them in selling costs if they are unpaid, or in the COGS if they are paid for. And about 2/3 of the deviation versus the prior year in the selling expenses was due to this effect, and that's just a shift from the R&D cost to the selling expenses. And the rest, about 1/3, is due to some one-off severance payments also in the selling area. This is independent of the announced program, the personnel reduction. But also in the selling area, we had some severance payments, all fully baked into our fiscal year '25 guidance. On the G&A, a little bit similar. Yes, we also had there some one-off severance payments, and we had some external services like consulting and insurance, smaller topics, all also fully baked into our '25 guidance. On the R&D cost, well, I mean, maybe I anticipate the question now because you asked only on selling and the G&A. Maybe I mentioned also the reduction in the R&D cost. Of course, there's a slight effect in here from this shift from R&D to the selling expenses. The majority of the reduction in the R&D cost is just due to operational reduction of external services.

The next question comes from Gustav Froberg from Berenberg.

Just 2 please. Staying on the indium phosphide side. Could you give us an update here on what you're seeing on the competitive side? I mean, who are you meeting in competitive discussions when selling the G10-AsP tool? And then on the build-out, just the timing question around mass manufacturing here. Is this something what you're seeing right now and there's a buildout ongoing? Or is this something that we should expect more for '26-'27?

Thank you very much for the question. So on the international customers, from the competitive side, of course, we meet our competitor Veeco. However, most of the customers have made their decisions and selected the G10-AsP, as I've indicated in my speech. So the tool is really having a fantastic track record and leaves many happy customers, and we get really quite outstanding feedback. It's very nice. In terms of the volume ramp, which I was indicating, we believe that the volume we are seeing is now certainly an indication of the volume for '25, '26. And from then onwards, we expect further growth towards '27, '28. And we can imagine that maybe '27, '28, the volume may increase 20% -- sorry, 50% compared to where we are today, maybe towards the end of the decade, maybe even double from the tool shipments that we see in this year, just to give you a rough outline on the trajectory that might unfold.

And just a final follow-up here. So what you're talking about today, is this something that came as a surprise to you? Or is this something that you've obviously been working on for quite some time, and it was only a matter of time for it to pop up? Or has this kind of popped up a little bit out of nowhere?

Well, it's always very difficult for us to predict an exact timing of things. I think, unfortunately, you've heard the answer from me already several times. But in fact, it's something that we have been working. And from a strategic level, we have been preparing that. First of all, we've been preparing that with a tool, with a G10-AsP tool, because we saw the requirements going into that direction and the strategy has played off very well. This is good. The product strategy has worked out. And we also have expected this market to pick up. We were actually quite surprised because we looked at all the data and the projections about that data demand and AI and communications. I mean, we all know this kind of the same data. And we've been wondering for quite some while, hey, when do we see it translate into actual orders? And well, it seems now really to be the point. And I think one reason for the delay was customers in this area undergo a very long and very in-depth qualification and design-in cycles. Because the customers of our customers, be it either the data center operators, but our customers typically then also serve the optical network operators, they are extremely -- they have extreme high qualification barriers. Because you imagine if such a device then also gets into undersea cables or whatever cables which are buried underground, you don't want the stuff to fail, but you rather want this to operate and then to operate for 15, 20 years in a row. That's the reason for this long qualification cycle. And essentially, we've been literally working for over 2 years with many customers on qualifications, on demos, on a demo tool with a customer, customer is coming into our lab, repeated [ loop cycles, ta-da-da ], you can imagine. And now it's really the time that multiple of our customers are through this cycle, and now this is translating after the selection and qualification period is done into actual order volumes.

Next up is Madeleine Jenkins from UBS.

My first one is just more housekeeping. Within your power revenue line, what was your silicon carbide-gallium nitride split last year? And kind of roughly where do you expect it to land this year?

I think it's both about 50-50 last year and this year and overall flat in total volume.

And then just my second question is on your demand you're seeing for your silicon carbide in China. I just wondered how you see that going into the next -- kind of into the rest of this year. We're hearing some news around potential consolidation of customers there. And I just wondered if you're seeing any of that and whether you expect that to impact your order book?

Well, we have a very strong silicon carbide China business in the first half. That's what we clearly can see, both from the orders already placed and also the shipments projected. I think China for us in '25 will be clearly stronger in the first half than the second half. But you never know, especially in China, how things unfold. It could also very well be that in the summertime, additional opportunities materialize, which we don't have on the radar yet. But for sure, I would say, as we speak today, my best projection I can give today is much stronger first half compared to second half.

The next question comes from Michael Kuhn from Deutsche Bank.

Essentially, a follow-up on the last one. So in Q1, I guess, equipment orders were in the area of EUR 105 million to EUR 110 million, and you still need EUR 140 million to EUR 210 million, let's say, in terms of short-term orders to reach the guidance. So I would say you need to keep that EUR 105 million to EUR 110 million run rate over the next 5 months or so to be able to deliver on it. So in that context, what was the start into the second quarter? You obviously mentioned [ silicon carbide ] Chinese customers ordering strongly. But let's say, what else is in the pipeline? And what, let's say, order appetite do you see in the market right now also given, let's say, macro uncertainties?

Very good question. I think overall, I would like to put upfront, we see ourselves confident to fill those EUR 140 million to EUR 210 million. We clearly have it on the radar. And we spoke to our regional teams and our sales teams and verified that, of course, upfront to this call. I have to double-check is it still up to date. And we can clearly confirm that based on the pipeline that we see. I think that's a very important message. Please also recall, just as a context, you probably have it on the radar. I just want to make sure that everybody has it. We are still on a pretty high level of inventory as we speak today. We have a clear target to reduce that, so to say. But due to the high inventory situation this year, we expect that we will still be able to ship tools before December 31 to convert into '25 revenue with, I would say, orders still received August, September, something like that. I mean, if all the parts are literally sitting in inventory, it's only about putting the tools together, testing it, and shipping it out. This is a luxury situation, luxury in the sense of short shipment time. Of course, not luxury. I would rather have the capital work for me and make interest than be in the warehouse. But that's a different topic. That's clear, so to say. But that's the context. So I think for the cutoff of until when we can collect orders and convert to revenue, ballpark, you can say, mid or end of Q3. That's just upfront. Now to the second implied part of your question, where do we expect the revenues to come in? We expect in the second quarter, so to say, looking into the pipeline, still quite some strong power electronics, some silicon carbides, but also some gallium nitride. Again, also China gallium nitride is ordering on a quite healthy level, I would say. In the second quarter, I mentioned that in my speech, we expect some volume to come from the laser and datacom area. I was indicating to additional customers. We expect some of the orders to come in or have come in already and coming in, in the second quarter. So this is a trend which carries us strongly also in the second quarter. And I think throughout the year, power electronics is continuing, as we said, about on the 2024 level. That's no growth, but at least it's flat. Towards the end of the year, also some other regions returning. And then I think in the second half of the year, we also expect some LED/Micro LED orders to come in.

Then one brief one on R&D. Christian, you stated that Q1 shouldn't be taken as a run rate. I think initially the statement was that R&D expenses will be down by mid-single-digit million amount in '25 versus '24. That is basically the number that was delivered in Q1 already. So will it be a little more? Or will we be kind of back to Q2 to Q4 '24 run rate for the remainder of the year? Just to get a little better feeling on the development of that cost item.

Yes. Michael, thanks for following up. Maybe I was not completely clear. I mentioned Q1 should not be taken as the run rate for the full year. Because there were also some -- a few positives and negatives, some one-off effects in there. So don't take that one as a run rate. For the full year, we expect a slight decrease compared to the prior year in the R&D expenses, as we have indicated in the full year results communication prior. Is that clear now, Michael?

Yes. No, absolutely. This is how I understood it, but just wanted to clarify and whether there should be any other nonrecurring factors to be seen there. One more on the Italian factory. Obviously, you have laid off some production staff as of late. And I think the Italian factory is not necessarily needed in the short term. Any changes to your planning there?

It's in sleeping mode. As your question indicates, it's in sleep mode right now.

Okay. And then last question. On the gross margin, you mentioned G10 tool enhancements for tools that were already delivered. So you delivered, let's say, some upgrades to clients. Is that all done, or anything else to follow later in the year?

I think 90% is done. So if there was a special Q1 effect, a onetime effect.

The next questioner is Ruben Devos from Kepler Cheuvreux.

I just had one briefly on the order breakdown by region. I was curious whether you were willing to share sort of the -- within power electronics, what was sort of the share by region, let's say, China versus Western demand. Not specifically for Q1 orders, but let's say, for the backlog, I would be most interested in. Yes, that's the first question.

Honestly, I don't have the breakdown, I have to say. However, I can indicate, I mean, we said there's quite some strong China and silicon carbide. So I think China and silicon carbide will be a big one, but I don't really have the data in front of me.

And just a logical follow-up, I guess. I mean, China has certainly helped you in the last year with the West maybe down somewhat. I guess the demand you've been seeing from Asia and China specifically has been ongoing for quite some time. So the logical question would then be how sustained do you think that could still be? I think sort of the silicon carbide substrate pricing seems to have been stabilizing, 6-inch prices have come down strongly, but now they seem to be stabilizing. I think EV penetration ratio, we can discuss on that for a long time. But yes, how do you just assess, let's say, the Chinese capacity ramp at this point? How sustained do you think that is?

Yes. The silicon carbide, it's a good point that you come to this topic. The strong silicon carbide price decline is actually helping a lot the overall penetration of silicon carbide in the market. Because if you look at the finished silicon carbide device, the substrate cost or the part of the substrate is quite significant of the total cost. And now as the substrate price is going down, overall silicon carbide power devices are getting much more affordable. That means they become much more competitive compared to IGBT devices, for example. And then a customer, let's say, an automotive, a carmaker, an ODM is looking at the whole topic at system cost level. And he's not looking at the chip costs where, of course, silicon carbide stays more expensive than an IGBT, but he says, oh, silicon carbide is now getting significantly less expensive, and with silicon carbide, I can use a smaller power module, and with silicon carbide, I'm much more efficient, so I have much less heat, which I have to remove. That is my overall system cost, including the cooling system, water cooling, or the metal stuff and so on is also getting cheaper. And that helps overall, in short, the penetration or the share of silicon carbide in the electric drivetrain, but also beyond automotive. So overall, you can take away that the silicon carbide price decline, I would say, will be a key driver for an acceleration in the number of wafers, silicon carbide wafers, which is being produced, and the market share that silicon carbide will take away from the overall power electronics is growing. And that means, in the end, for us as an equipment maker, it's helping to drive and to stimulate overall equipment demand in silicon carbide. So we very much welcome the price decline in the silicon carbide substrates.

I just had a final technological question. Do you anticipate sort of any shift in epitaxy equipment demand tied to advanced packaging requirements? I mean, thinking about these chiplets or 3D integration, I think you already talked about the optoelectronics side of things. But yes, is there any shifts we should be aware of in terms of epitaxy equipment?

We don't see any impact on our side. As you know, we are involved in making equipment for the deposition of layers on something. And we anticipate -- we discussed that for the optoelectronics, and we also discussed potentially AI and gallium nitride power electronics, but you will still need to make the chip which then at some point gets integrated into something else. We are not involved ourselves in the integration. This is mostly the guys who's doing, for example, the wafer bonding is a very important step or other people of making back-end equipment and AIXTRON is not part of this part of the value chain, and also we don't intend to go into that part of the value chain. But we are still -- it overall helps. This is how we see it. It helps overall stimulate and drive demand. We are connected to the applications. We touched 2, GaN power for AI and datacom for AI. So it's a driver and a stimulator for the demand of our equipment, but we are not directly impacted by this.

And next up is Malte Schaumann from Warburg Research.

First one is one gallium nitride. Do you have any visibility for kind of an uptake in demand going through the year? Or is that something which remains a bit subdued at the moment and would rather be expected then for next year, early '26?

Yes. A good question. Unfortunately, visibility outside of China is very low. As I indicated, China in '25 is running well, continues to build out capacities. But outside China, the visibility is simply very, very low. And I think the whole world is also looking now what's happening with this whole tariff stuff, what impact does it have on the economy. And I think only when that kind of stuff is clear, then we'll really see more clarity on that one. I don't have a perspective, I honestly have to say.

Then second question on inventory levels. I mean, you earlier indicated that you expect to be done with your inventory correction at your side during the year. During the first half of this year, inventories came down only quite marginally in the first -- towards the end of the first quarter. So what's your take on the inventory levels going through the year? Do you still expect to be done, let's say, at the latest by the end of this year?

Yes. The reason why the effective overall resulting number was just down a little bit from year-end '24 until now is that there was still quite some numbers of inventory and placed orders were coming in. That's the reason. Now those orders which had been placed, and at some point, there's just no point to cancel something and pay a cancellation fee. I mean all our products are up to date, our product portfolio, right? There's no product which is getting towards obsolete. So, of course, we then rather take it and keep it in inventory and ship it some quarters later, so to say. But that part of inventory or parts which we don't need, but is still incoming is, so to say, now over that period. So we are just now, I would say, starting the period where we are looking at net inventory outflows and net inventory reductions. And towards the end of the year, of course, it always depends a little bit on the product mix, is it coming exactly as we expect or is it coming a little differently, I would expect inventory levels between EUR 250 million and EUR 300 million.

The next question comes from Martin Jungfleisch from BNP Paribas.

A sort of follow-on question on gross margins. I mean, these were quite weak, even if you strip out the EUR 5 million restructuring charge. You mentioned product mix and these other product effects. But when you look at -- I think the power share was higher, also FX probably a small tailwind. Could you quantify the specific G10 product spec headwind more specifically? And then would you expect gross margins back over 40% in the second quarter? Or would gross margins in general be more back-end loaded again this year? That's the first question, please.

Well, I'll take that question, okay. We don't quantify exactly the amount here on the upgrades here, but the product mix effect was primarily driven by a large share of shipments to China, especially for old series, that came in at quite low margins. Of course, that is fully baked into our full year guidance. So logically, you can expect an uptick in the gross margins throughout the year. Could be back-end loaded, yes, just similar like last year.

And the second question is just on order backlog and just on the -- have you seen any order cancellations during the quarter? So when you do the delta between orders and equipment revenues, is it any ForEx related, the delta?

Not in the first quarter. We have seen some pushouts that was there from earlier in the year towards back-end loaded of the year, so to say, that we've seen. But there was no cancellations in the first quarter. We had a little bit in the Q4 of last year, but not this one.

And next up is Daniel Schafei from Citi.

So basically, I was just wondering regarding guidance, given that you still expect kind of some demand to come in the second half. Just trying to understand what are your discussions right now with customers given that we have all of this uncertainty in the macro picture. Do you have regular updates with those customers? And are they kind of sustaining their view that the orders should come in, in the second half? Or do you potentially already hear some softening in their tone?

No, we have not heard that. So I think this effect of customer, let me say, customer interest, or I don't know how to word it, so to say, getting weaker. I think that's what we have seen towards the end of 2024. Especially, I think what you are alluding to is also the big listed Western power electronics customers. I think we all know the pictures about what's the backlogs, what's the CapEx, what's the CapEx reduction plans of the major power electronics players, whether this is TI, Analog, Infineon, STMicro, Onsemi and so on and so forth, I think this is what you're alluding. Those guys, of course, are not ordering at this point in time. I think this is very clear. I think they are showing to their shareholders to really reduce, so to say, the CapEx and fill the unused capacity. So the demand at this point in time is coming, of course, from customers who really need the tools. And we spoke about the laser domain. And we also expect throughout the year some red LED, Micro LED to come. I mentioned silicon carbide from Asia, and gallium nitride also from Asia to a big part from China, but not only China. So this is where you see the customers who continue and who see -- have a perspective on the market and who have a perspective on their customers again, where they say, hey, I'm entering this business segment now, or I'm expanding because I see this and this business opportunity. Let's recall, in China, the tech industry is booming, the EV industry is booming, and there's people who have a connection to their customer base where simply tools are needed for an expansion. I think the world is really running at 2 different speeds at this point in time. The news flow around us is really in the world, which is slow, but there's also the other world which is continuing and continuing to expand.

Just to expand on the Chinese demand. Given that you already alluded to this that the first half should be stronger than the second half, can we understand in a way that there is potentially kind of [ pull-in ] in demand given all of those uncertainties? And is there a risk that the Chinese demand will kind of -- not fall off of a cliff, but kind of drastically reduce in the second half? Is that correct?

No, I don't see that as any geopolitical-driven topic. If I talk to my customers, there's a clear demand, there is markets behind it. So I don't see it a political-driven ordering. But how I would phrase what you're alluding to, at least I understand your question right, so I really see it, it's demand and end market driven.

And the next question comes from Veysel Taze from Metzler.

Veysel Taze from Metzler. I have 2 questions. The first one would be around your opto business and your comments. You said that 2027 business could grow 50%, 2028 similar range, and then by the end of decade, even faster. I was wondering in your opto business, when you comment on that, it's not the total opto business, right? I guess you're referring to the datacom business. And how big is your datacom business today?

That's a very good question. You have exactly inferred right. I was referring to the datacom business. That's perfectly the right indication. Let me just give you an indication. I think the laser and datacom, so to say, which we put together this year, as I mentioned, is about a little less than 20% of the equipment orders that we expect for the full year. You have our guidance, so you can do the math, so to say. And on top of that comes, of course, the red LED business and the Micro LED business, which follows completely other or different end market dynamics. The red LED, if you recall, is mostly driven by lighting applications and mini LED applications. And I think Micro LED, we all know is, again, a very sophisticated high-end application, which is still in the preparation, which we expect also to pick up at some point in time. But I think we spoke about in our previous earnings calls, nobody knows the exact timing for the Micro LEDs.

Got it. And then the second one, also related to this topic. I think you mentioned the second customer win, and it is related to AI, if I understood correctly. Can you give a bit more color around what type of application or use case will be for the second customer?

It's also datacom, but particularly it's one of the established data communications photonics players, so to say. But we know exactly that this is in conjunction with one of the major AI players, so to say, to literally drive the optical data exchange between chips in the platform. So that's the application. And the customer is one of the established photonics optoelectronics players because in this business, you really need to have decades of experience in order. So nobody would just, as a newcomer, enter that field. This would be very naive and blue-eyed.

Sorry for the confusion or my misunderstanding, but it would be not the co-packaged optic that you integrate that on the package level. It's more for the data transfer, right, between servers or server racks. So basically the old world of cabling where you use this technology or the customer will use this, right? It's not the co-packaged optics module.

I have to admit that I don't know exactly what the plans of my customer are to this level of detail. I have to say, I'd rather leave it at this point. I may mislead you otherwise.

And then really a final one. Regarding your LED business, I think Q1 sales was quite good. But I was wondering if you can give a bit color around the mix in the order backlog, how much LED business is left there?

Honestly, I don't have the numbers ahead of me. I think for the full year, we expect something -- for the full year, we expect something roughly on the order of 10% of total revenues for the LED and Micro LED. So it's a decent portion for the year, but it was more in the years before, and it will be more in years to come. It's a solid contribution.

There are no further questions.

Well, then, thank you very much, operator. Thank you all for listening in. Thank you for your questions. The IR team is at your disposal if any questions still pop up or unanswered. And with that, I wish you all a great -- well, we have a holiday tomorrow. For those who don't, have a good week, and we'll talk to you at the latest with our Q2 results end of July. Thank you, and goodbye.

Your conference call has come to an end. Thank you for attending. Goodbye.