AIXTRON SE (OTCPK:AIXXF) Q2 2022 Earnings Conference Call July 28, 2022 10:00 AM ET
Company Participants
Guido Pickert – Investor Relations
Felix Grawert – Chief Executive Officer
Christian Danninger – Chief Financial Officer
Conference Call Participants
Olivia Honychurch – Jefferies
Charlotte Friedrichs – Berenberg
Martin Marandon – ODDO
Jürgen Wagner – Stifel
Lucy Liu – BlackRock
Operator
Good afternoon, ladies and gentlemen and welcome to the Conference Call regarding Q2 2022 Results of AIXTRON SE. [Operator Instructions] We will now turn the floor over to your host, Guido Pickert.
Guido Pickert
Thank you very much, operator. Welcome to AIXTRON’s presentation of our Q2 and first half ‘22 results. I’d like to welcome our CEO, Dr. Felix Grawert; 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 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 a transcript on our website at some point after the call.
I would now like to hand over to our CEO for opening remarks. Felix?
Felix Grawert
Thank you, Guido. Let me also welcome you all to our results presentation. I will start with an overview of the highlights in 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.
Let me start by giving you an overview of the key business developments in Q2 on Slide 2. Demand for our equipment remains dynamic across the board, resulting in an outstanding order situation with an order intake of €153 million for Q2. We have received our first order for the volume production of Micro LEDs, which is very encouraging. In addition to that, demand for our equipment to produce efficient power electronics was, again, very strong this quarter with demand for laser tools remaining strong as well. This leaves us right now with an order backlog of €314 million, of which the majority is due for delivery still this year.
Revenues in the quarter increased by 51% year-on-year to €103 million. Gross margin was slightly lower than normal at 37% in the quarter due to a high share of tool deliveries to make traditional red LEDs and some onetime project costs to further optimize our operations. EBIT more than tripled year-on-year to €17 million, resulting in a quarterly net profit of €17 million or €0.16 per share due to the further recognition of tax loss carry-forwards.
Based on the strong demand for our products, we can again confirm our original guidance for the fiscal year 2022, which we have first given in February of this year as we are fully on track to achieve what we have guided for orders, revenues and profit margins. Orders will remain on high levels, while revenues and margins are expected to be higher in the second half of 2022 versus the first half of the year. In fact, we expect Q3 to be stronger than Q2 and Q4 to be stronger than Q3 in terms of revenue this year again. I am glad that today’s global crisis situation still do not have a significant impact on our business. Logistics and supply chains are still not back to normal. They remain tense, but they continue to be stable. We are in close exchange with our suppliers and support them wherever required.
Now, I will hand over to our CFO, Christian Danninger. He will take you through the Q2 financials. Christian?
Christian Danninger
Thanks Felix and hello to everyone. I’m happy to share with you that we had a very strong quarter again, both from an operational as well as from a financial perspective. Let me start with our income statement on Slide 3. Total revenues for the second quarter 2022 were close to €103 million, 51% above the same quarter of last year. Gross profit went up by 36% year-on-year to €38 million. The gross margin at 37% was influenced by less favorable product mix and onetime costs for projects to further strengthen our production and supply chains. Both effects were only partially offset by a favorable U.S. dollar-euro exchange rate, which affected around 36% of our revenues that were recorded in U.S. dollars.
OpEx in the quarter decreased to €21 million from €22 million in the same quarter of ‘21, mainly due to lower R&D spending resulting from the timing of projects. Our EBIT in the quarter more than doubled year-on-year to €17 million from €6 million the year before. EBIT margin was 17%. We again utilize tax loss carry-forwards and capitalized additional deferred tax assets in the amount of €2.5 million due to expected future profits. We can therefore report quarterly net profit of €17 million, which also more than doubled compared to €8 million recorded in the same quarter of last year.
Turning to the balance sheet on the next slide; inventories at the end of June 2022 have risen to €162 million from €144 million at the end of March in preparation for the higher expected business volume in the coming quarters. As part of our supply chain strategy, we also keep strategic inventories of selected components to maintain and ensure our capability to timely deliver our tools to our customers.
Due to the high demand supporting our revenue guidance for the year, advanced payments we received from customers by the end of June 2022 increased to €104 million from €81 million at the end of March, representing about 33% of our order backlog. Trade receivables increased €58 million from €50 million at the end of March due to a higher share of shipments at the end of the quarter. Our cash balance, including our other financial assets decreased to €346 million at the end of the quarter from €375 million at the end of March. The reduction is mainly due to the dividend payment of €34 million in May.
Moving to our cash flow statement on Slide 5, in Q2 of 2022, free cash flow was at €4 million compared to €18 million in the same quarter of last year, mainly due to an increase in inventories and trade accounts receivables, combined with a right and advanced payments received for customer orders.
With that, let me hand you back over to Felix. Felix?
Felix Grawert
Thank you, Christian. Before giving you our updated view of the outlook for the second half of the year, I would first like to give you a quick update on the key developments in some of our addressed markets. In most of our addressed end markets, we continue to see strong momentum. As previously mentioned, we have shipped a sizable number of tools to produce [Technical Difficulty], representing the largest share of [indiscernible]. The second largest contributor, were tools shipped for silicon carbide power electronics.
The next biggest contributor to Q2 revenues were tools to make datacom lasers. Energy-efficient power electronics based on wide-bandgap materials continue to be broadly adopted in an increasing number of applications, replacing less efficient silicon. We see that in the orders and revenues for our systems in these areas. In GaN power, the strong momentum continued going far beyond initial customer applications such as chargers. Our customers are already addressing opportunities and applications with 24/7 operations such as data centers, base stations or household appliances, such as refrigerators, just to name a few.
Market adoption of GaN in these applications is driven by energy savings offered by efficient GaN-based power supplies compared to silicon power electronics. In addition to these applications, we see our customers already looking further ahead, for example, towards motor drive or applications in battery electric vehicles. Therefore, we believe that demand will continue to be driven by the structural demand drivers behind it. In silicon carbide power, we see our customers building up or expanding their capacities based in the fast-growing adoption within battery electric vehicles, replacing silicon as a material.
As we have said before, our new silicon carbide tool for 6- and 8-inch wafers is showing very good performance. It offers high throughput due to its multi-wafer batch approach in combination with full cassette to cassette automation. At the same time, it offers individual wafer process control with a high-quality output. This makes us strongly believe that we have a highly attractive solution in our portfolio, particularly in comparison to single-wafer solutions being offered by competition. The growing acceptance of our existing and our new customer confirms our view.
In the area of Micro LEDs, we are very happy to announce that we have received a first order for the volume production of red, green and blue Micro LED from our customers. This is very encouraging as this is seen as clear evidence that preparation to develop and launch a first commercial product has started. As we have stated before, this development makes us increasingly confident that we will see further commercial products with Micro LED displays, such as televisions, notebooks or smartphones and smart watches going forward.
With that, let me now give you an update on our full year guidance for 2022 on Slide 6. Based on the strong business development in the first half and our positive view on the development of our business in the second half of the year, we confirm our growth guidance for the full year 2022 originally issued in February. Including the €283 million of orders recorded in the first half, we continue to expect total orders for the year in a range between €520 million and €580 million. We continue to expect our 2022 revenues to be in the range between €450 million and €500 million. This is based on the €191 million of total revenues recorded in the first half and built on our equipment order backlog of €340 million, of which a large part is due for delivery during ‘22.
Based on the 39% gross margin and a 16% EBIT margin we achieved in the first half, we continue to expect a gross margin of around 41% and an EBIT margin in the range of 21% to 23% due to the stronger expected business volume for the second half of the year. These expectations for 2022 are subject to the provision that the current global crisis situation around us will not have a significant impact on the development of our business.
With that, I will pass it back to Guido before we take questions.
Guido Pickert
Thank you very much, Felix. Thank you very much, Christian. Operator, we will now take questions, please.
Question-and-Answer Session
Operator
Yes. [Operator Instructions] And the first question comes from Olivia Honychurch. Your line is open.
Olivia Honychurch
Hi, thank you for taking the question and congratulations on a good set of results. I have got two questions, if that’s alright. The first is on silicon carbide and then I will follow up afterwards. So we recently heard that ASM International had acquired LPE, I think and as we know, there is another player in the silicon carbide epitaxy space. It seems they offer a tool that has single wafer capability, which obviously differs from your proposition, which offers batch. I believe the LPE has said that a large proportion of their future revenues are coming from China. So, I was just wondering what you think is driving those customers, whoever they are or wherever they are from to choose a single wafer tool versus a batch. And as in other context, I think generally, the Chinese company’s approach tends to be more around price sensitivity and focused on higher productivity. So I suppose I am really asking in the context of whether this could impact the outlook of your silicon carbide business in China going forward?
Felix Grawert
Thank you very much for the questions. Yes, of course, we know LPE as a competitor in the market. Of course, also in the China market. And of course, we have followed also this acquisition in the industry. It is true that the LPE is deriving according to our observation, most of their revenues of their tools from China with their silicon carbide single wafer tool. I think the reason why China has adopted this tool quite well is that this tool can be operated in a – what I would call it, semi-manual mode, not fully automated so in contrast to our tool. And we all know that labor cost in China is relatively low. So it can be operated with a high manual effort with a lot of labor around the tool, which is cheap in China and then also be operated in a very cost efficient way. I think that is the reason for why the LPE tool has a good spread already in the China market and that is also the principle that right now also local Chinese competitors are, of course, following.
Olivia Honychurch
Okay. That’s helpful. Thank you. And then the second question was around the – or the short of orders for Micro LED. So obviously, you’ve had the first chunk of big orders in this quarter. How can we think about the shape, the momentum and the timeframe of the remainder of those orders coming from your first volume customer going forward over the next few quarters? Will it be that it’s a similar level of orders in each quarter for the next three or four quarters, for example or will there be more of an upward ramp or would it be less frequent than that? Just an idea of what the timing would be very helpful?
Felix Grawert
Well, Olivia, you ask a very difficult question. Let me try to answer what I have in my head about it. It’s a very detailed question. I don’t have all the details in my head, yes. So we have received as indicated, the first order shipping starting towards the end of this year. And as we have indicated, this is the beginning of the ramp, which will extend and continue then of course throughout the year 2023. So throughout the year 2023, you will continually see Micro LED shipments as the customer is building up the capacity. And these orders will then, I think, start later in the second half of the year. And of course, in terms of order volume extended through the beginning of the first half of 2023 in terms of when we record the PO, I would say, to give you a high-level indication. And that, of course, is for a customer building a first, so to say, align a Micro LED production line, we have indicated it’s all three colors, RGB. So this is a customer really playing in one of those highly innovative fields, bringing out a very clear consumer electronics product.
Olivia Honychurch
Fantastic. Thank you. And sorry, if I can just go back to my first question quickly on LPE – given what you said about the semi manual nature of the tool, can we infer from that, that their tool is perhaps slightly lower in AFP than yours given it’s fully automated?
Felix Grawert
Yes, absolutely. I think our tool is producing 4 to 5x the number of wafers. And of course, our tool is much, much higher priced given this much higher output of wafers.
Olivia Honychurch
Okay, fantastic. Thank you so much.
Operator
The next question comes from Charlotte Friedrichs from Berenberg. Your line is open.
Charlotte Friedrichs
Hello. Thank you for taking my questions. Two or three questions. The first one would be if you are generally seeing more competition in silicon carbon, if I didn’t misunderstand, you did mention that you’re seeing somewhat more competition in the Chinese local market here. And then on Micro LED, did Q2 already include a revenue contribution from Micro LED here? And thirdly, are you seeing any kind of impact from weaker consumer sentiment now on order intake demand or the conversations that you’re having with customers in Micro LED or at the big space? Thank you.
Felix Grawert
I think I didn’t fully get your second question. Could you repeat that?
Charlotte Friedrichs
The second question was if you already had a revenue contribution from Micro LED now in the second quarter a meaningful one.
Felix Grawert
Okay. Now I get it. Thank you very much. Yes, let me address your three questions. So I had mentioned in conjunction with the question on SE impact, that – in China, there is equipment competition and [indiscernible] now for silicon carbide. We have also added to our competitive environment to two players in this market to our competitive landscape to give you a fully accurate picture reflecting this. And I think this is a very natural development. We all know that China has a big automotive industry. China is a leader in electrification. Now China is heavily switching to what silicon carbide in the drivetrain and in the partial infrastructure as well. And with that, we observed overall in China, the buildup of a complete local silicon carbide value chain that ranges from the local production of substrate, wafers, that ranges to device maker, producing the epi but then also producing the silicon carbide MOSFET and lastly, also Chinese players trying to enter the market with their own equipment. Yes, this is true. There is a complete value chain being built up in China.
With that, let me switch to your second question, whether we had any revenue already in the second quarter on Micro LED. Yes, we did have a reasonable number of Micro LED revenues in the second quarter. And just looking through my table in my data here, in the second quarter, revenues for Micro LED was the fourth largest segment of revenues, contributing somewhere between 10% and 20% already, yes. However, these 10%, 20%, were still multiple customers more towards R&D and pilot lines. And as we have indicated with the comment that we made in our press announcement is the remarkable thing is that we really got an order for volume production, which is shipping later in the year, yes. So the revenue we did actually for multiple customers, yes, is more towards the preparation and the development pilot line qualification of this technology.
With that, let me come to your third question about the weaker consumer sentiment. We observed here a strength which vary highly by end market. And that is, of course, we see inflation at global scale in the United States and in Europe, quite heavily, quite strong numbers, which we haven’t seen for decades. And as a result of that, our customers in the consumer electronics domain are more cautious about investments. We see that both from the domain of television, but also from the domain of smartphones and handsets, I think everybody has seen those numbers quite significant drops that these segments are realizing. So as a result of that, the products that we ship into those segments see a bit weaker demand. We get that signal also from customers. However, this makes for us as only a very small portion of our overall revenue. So I would say that maybe a 20%, maybe 25% portion of our total revenue be affected by that. On the other hand, we see that the segment of power electronics, both gallium nitride power, but also silicon carbide power strongly increasing, and the increase and the demand side pull from customers is continues to be strong, and we see that even some customers are upping their orders, asking for even more systems that they hadn’t forecast before. So we believe that the power electronics is more than offsetting the somewhat weaker trend that we see on the consumer electronics side. And last but not least, we all know Micro LEDs, of course, also go into television smartphones, smart watches, so consumer electronic devices, we get very clear signals from customers in those end markets that their ramp plans, the development for innovative products are continuing and are not getting put on shelf or getting delayed or anything like that. I hope this gives you a complete picture around the end markets.
Operator
The next question comes from Martin Marandon from ODDO. Your line is open.
Martin Marandon
Yes. Good afternoon, everyone. Thanks for taking my question. My first question would be on gallium-nitride and how much is the penetration of gallium-nitride for fast charging at the moment? That’s my first point. And how is the split between fast charging and new applications such as data centers, white goods [indiscernible] at the moment? Then I have a follow-up.
Felix Grawert
That’s a very good question. So the penetration of gallium-nitride in fast charging, I have to admit that I don’t have hard data from industry analysts. Nevertheless, I have perception, yes. This is just based on observations that I have also what I see what customers are launching and what’s in the discussion in the industry. And the impression I have, again, it’s not backed by hard data is that is very, very, very significant part of the fast charging had migrated to the GaN chargers. Yes. Look at all the many GaN chargers that you can buy on Amazon, everything the size of like an iPhone charger, but now 45 or 65 watts. You may have seen Infineon did a press announcement today about an integrated one, not only GaN but including some driving electronics today with the maker, Anker, that was out. They are the leading aftermarket player for this one. So my impression is that for the fast charging of smartphones, it’s already a leading a dominating share. Again, it’s just an impression, and I don’t have the correct data from analyst houses here. While I observed there is still many laptops shipped with traditional GaN-based power supplies, but I hope that will also change over the next year.
Then coming to the second part of your question, if I get it right, on data centers, we also see the penetration going very fast. And especially I hear from customers that Western data center players who are all subject to reporting the greenhouse gas emissions. I’m thinking of large players like Google, Amazon, Facebook, Microsoft, who operate the big data centers in the Western Hemisphere, I hear that all new equipment are totally being done based on gallium-nitride, simply in order to satisfy the demand that all of us these days have that new infrastructure buildups are made in a CO2 friendly manner. And I see – and I get the feedback from customers in China that in China, this trend is also just starting now. It’s not – does not have the full penetration yet, but also in China, where electricity is getting more and more expensive and greenhouse gas emission topics become more and more prominent, a penetration of GaN is to be expected.
Martin Marandon
Okay, thank you. Very helpful. And I have just a quick follow-up on coming back on NPE acquisition. They gave a revenue target for 2023 around €100 million. I think it surprised quite a lot of people. So does that mean that actually LPE has a bigger market share than you at the moment or is it the case number that we should expect also for you in 2022?
Felix Grawert
So I cannot comment on the €100 million revenues. And so I don’t know where this number is coming from, yes. I mean, very clear. This is a competitor, and we don’t look into their plans or their design-in pipeline. I can clearly say that the presence outside of China is very small. Nevertheless, inside of China, they have a very good presence. And in order for that number to come true, that would mean that one of their customers is really – or some of their customers are really planning a significant capacity buildup in the next year.
Martin Marandon
Okay, thank you. Very clear.
Operator
And the next question comes from Jürgen Wagner from Stifel. Your line is open.
Jürgen Wagner
Yes. Good afternoon. Thank you for taking my question. Actually, I have a follow-up on Micro LED, how sizable was the order for – from that volume customer in Q2 and what is left for Q3, Q4? And you mentioned you have some pilot line business. I mean, beyond the current – or the customer that is currently ramping production, how advanced are discussions with those other Micro LED customers on timing for their volume ramp? Thank you.
Felix Grawert
Thank you. This is very good – two very good questions on Micro LEDs. The size of the first order that we’ve been announcing and on commenting in our press release was, I would say, a good handful two handfuls of systems to give you an idea. So a sizable set towards buildup of a line. The overall size of the line to be installed 2023 is much larger and the step-by-step the orders will trickle in over the second half of the year and first half of ‘23, as I have indicated. Now I think the second part of your second question is also very interesting, how advanced the discussions or the qualifications are with other customers. And the answer to that is it varies a lot. I observed some of our Micro LED customers to be still in an early stage or a mid-level stage of maturity in their development. Other customers – with other customers, we are discussing very concrete plans for a ramp. So in order to say what does it mean for us and AIXTRON, I would say it means very clear that 2023 throughout the year, we will see a substantial portion of our revenue to come from Micro LEDs, both in the first half of the year, but also in the second half of the year. And then assuming that further of the customer engagement, which we have right now kick in, this trend will clearly continue 2024.
Jürgen Wagner
And are those Chinese and Taiwanese players?
Felix Grawert
This is all over the globe.
Jürgen Wagner
Okay. Thank you.
Operator
There are no more questions. [Operator Instructions] There is another question from Charlotte Friedrichs. Your line is open.
Charlotte Friedrichs
Yes, a couple of more boring ones if you allow. So your services revenues were quite strong again in the second quarter. If I recall correctly, you said Q1 had some one-offs that were positively affecting that. Is that also the case now in the second quarter? Or is that sort of the new run rate that we should expect for services and parts?
Felix Grawert
This is on services or what is the question related to?
Charlotte Friedrichs
On parts and services.
Felix Grawert
Did you know that question?
Christian Danninger
I’m not sure if I got the question completely.
Felix Grawert
Charlotte, could you do us a favor and repeat it? We are not fully understanding it, I think.
Charlotte Friedrichs
Okay. But so your spare parts and services revenue in the second quarter was quite strong again compared to the prior year. You did comment in the first quarter that there were some one-offs in there, but now Q2 is strong again. So the question is, is that the new run rate? Or was there again a positive one-off effect in the second quarter?
Felix Grawert
I think we are approaching a new run rate. It may not always be around 20 plus, but it may be around the 20ish, it could also in some quarters be 17 or 18 but I would say it’s approaching about a 20ish yes. I think it is increasing. And a driver for that is a big part that we are addressing on the one hand, more mature customers who like to take on a service contract with us in order to make sure that the tools are running very well, supported by our service engineers and technicians. And secondly, the percentage of gallium-nitride and silicon carbide equipment of our installed base is increasing. And with these two materials or AIXTRON tools producing these two materials have a slightly higher consumption rate of consumer facilities in the established gallium arsenide default tools.
Charlotte Friedrichs
Okay. Understood. And then on pricing or your cost base, are you planning any price increases this year? I know it’s not always a like-for-like comparison. But is that a conversation that you’re having with some of your customers to reflect potentially higher raw mats and labor costs?
Felix Grawert
Definitely, definitely. We did increase our prices at the beginning of this year. And we are looking at the global supply chain prices at the cost of materials – just look at the prices for steel and copper and electronic components like chips, but also electricity and labor. And of course, we will increase our prices at the end of this year or beginning of next year, again, to compensate for those inflation effects that we see.
Charlotte Friedrichs
And can you give us an order of magnitude for that? a), how much you’ve already increased and also b), how much you’re planning to increase roughly?
Felix Grawert
Well, I think there are two things to mention. First of all, you need to take into account that after we announce an increase, it’s valid for all orders which are placed after that point in time. And the shipments for that occur typically now 9 to 12 months after an order is placed. That’s the lead time that currently we have due to the increased demand and volumes and also the tighter supply chains. So all effects come into play with a bit of a delay, which is not a problem for us because also the material that the order comes in that point in time. So the price increases of costs match very well the price increases that we can realize on our revenues, yes. However, from the point of announcing there is a delay of 9 to 12 months in case you build a model for that, yes. The size of that, I would say mid- to high single-digit numbers.
Operator
The last question comes from Ms. Lucy Liu from BlackRock.
Lucy Liu
Thanks for taking my question. I have a similar question. I want to check on margin. So I noticed we had very high backlog. So I wonder if the pricing already fixed at the timing of booking, given you just mentioned, we have a long lead time. So what rate the inflation environment will have a pressure on the margin. So I want to have more color. Thank you.
Felix Grawert
Yes, I can take your question. This is logic that doesn’t explain totally applies here to the order backlog. So big part of the order backlog already includes an increase in our prices, and we expect to go increasing prices on the material side, go pretty much in line with the realization of the price increases that we have now already in the backlog. So we do not expect a negative effect on our gross margins from inflationary effects.
Lucy Liu
Got it. Thank you.
Guido Pickert
Thank you very much. With that we conclude today’s call. Please all stay safe, have a great summer, and please feel free to contact us if you have any additional questions. Thank you and bye-bye.
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