AIXTRON SE (OTCPK:AIXXF) Q3 2022 Earnings Conference Call October 27, 2022 9:00 AM ET
Company Participants
Guido Pickert – IR
Felix Grawert – CEO
Christian Danninger – CFO
Conference Call Participants
Michael Cohen – Deutsche Bank
Olivia Honychurch – Jefferies
David O’Connor – Exane BNP Paribas
Jurgen Wagner – Stifel
Martin Marandon – Oddo BHF
Lee Meyer – Lord, Abbett & Co. LLC
Operator
Good afternoon, ladies and gentlemen and welcome to AIXTRON’s Conference Call regarding the Q3 2022 Results. At this time all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation.
Now I hand over to Guido Pickert, VP Investor Relations and Corporate Communications at AIXTRON.
Guido Pickert
Thank you very much. Welcome to AIXTRON presentation of our Q3 and nine-months ‘22 results. I’d like to welcome our CEO Dr. Felix Grawert as well as our CFO. 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 two 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 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 two.
Demand for our equipment remains strong with an order intake of €143 million up 25% year-on-year driven by the strength of the growth market, 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, to produce optoelectronics as well as tools to produce LEDs, including Micro LEDs also remain strong. As a result of all that we can report a very strong order backlog of €369 million, up 38% year-on-year.
Our quarterly revenues are affected by some temporary circumstances which are mainly due to a few customers 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?
Christian Danninger
Thanks, Felix and hello to everyone. Let me start with the financial highlights of our income statement, on Slide three.
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 €89 million, gross profit at €39 million, EBIT at €16 million and net profit was €90 million for the quarter, which is below prior year, mainly due to the mention 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 €23 million, predominantly driven by higher variable compensation elements combined with slightly higher R&D spending.
We again utilize tax loss carryforwards and capitalized some additional deferred tax assets in the amount of €9.4 million due to expected future profits. We expect to realize exceptionally higher shipments in Q4 and therefore revenues, gross profit, EBIT and net profit, at the corresponding high level enabling us to reach our upgraded guidance for 2022.
Now to our balance sheet on slide four. The previously mentioned shifted tools shipments and the inventory built-up to prepare for higher expected — for the higher expected business volume resulted in inventories at the end of September in the amount of €209 million.
The advance payments received from customers we had on our books at quarter end, were €122 million, representing about 33% of our order backlog. This led to total cash balance, including other financial assets of €339 million. Out of these €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 €7 million, which was up 61% compared to last year’s level.
With that, let me hand you back over to Felix, Felix?
Felix Grawert
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 address 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, and aligning with the cost 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. It’s fully automated multi-wafer batch tool, processes, 9 and 6 inch wafers or 6 and 8 inch wafers process one, enabling our customers to produce the wafers at the lowest cost in the market today.
Today, most customers are still running the main volume of their production line on 6 wafer size. 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 a customer feedback and the orders we have received within the first quarter of the launch.
At this point in time, we are demonstrating the new system to serve our customers in order to convince market participants who are not yet using our system.
The main driver for silicon power covered power devices remains electro mobility with use cases in the main inverter, the onboard charger and in fact charging port on the road side. In addition, we see more and more customers investigate higher voltage silicon carbide devices at 3kv a 10kv, 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 all the intake in Q3 ‘22. We continue to see additional customers in the area of power electronics, enhancing the portfolio by GaN power device. This has driven to a large part by the tremendous potential of GaN power devices to increase the efficiency of energy conversion. The combination of rising energy prices and increasing awareness for energy savings and going to net zero 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 project. We expect to ship first volume orders in ‘23 into one or two 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 them a 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 six. 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 revenue. Based on this, and a strong customer demand, we upgrade our original full year 2022 guidance.
Orders are now expected to come in between €540 million and €600 million from previously $520 million to €580 million. We leave our revenue expectations unchanged at a range between €450 million to €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 pass it back to Guido, before we take questions.
Guido Pickert
Thank you very much Felix and Christian. Operator, we will now take questions please.
Question-and-Answer Session
Operator
[Operator Instructions] And the first question comes from Michael Cohen from Deutsche Bank.
Michael Cohen
Good afternoon, gentlemen. And few questions on a complex topic. And that is the delivery and sales delays that you saw in the first quarter. Firstly, you mentioned some customer… [Technical Difficulty].
Operator
We don’t have him on the line anymore. So, just we go to the next question here. Just a second. And next up is Olivia Honychurch from Jefferies.
Olivia Honychurch
Hi, thank you for taking the question. Two from me if that’s okay, so firstly, on the silicon carbide side. It sounds like you’re making a 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. And 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 selection carbide tool in the quarter? And then I’ve got a follow up as well.
Felix Grawert
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 the tool, but overall, as we continue to make inroads into silicon carbide for a covered market by broadening and further expanding our customer base. And that makes us very positive also for further growth out of this segment.
Olivia Honychurch
That’s good to hear on the new customer side. I mean, can you give us any color on who, those customers might be in terms of geography or potential side or how they could fare in terms of order tools and size versus your existing customers on silicon carbide?
Felix Grawert
The new customers are very, very broad in geography, some is in Europe, some is in from Korea, some is in Taiwan, some is in China, some is in the U.S., we are making good progress, I would say worldwide.
Olivia Honychurch
Okay, that’s good to hear. Thank you. 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 we — can I ask if you receive them since the end of the quarter? And if not, then when would you expect those to come through and I guess separately as a follow on from that, what risk is there that these issues keep popping up in the future quarters? You see shipment delays coming through because of export license issues?
Felix Grawert
Thank you very good question. No, we have not received the particular export licenses that were — the root cause for the push out from Q3 into Q4. So they have not arrived yet. However, we expect them to come in the next weeks. Don’t know when exactly it’s going to be.
And also relating to your question is there a risk or 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 absolutely, revenue guidance, which we have not increased, as we might have, in order to fully reflect that risk. And 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 the capacity and bandwidth topic, one of them other topics is deeper scrutiny that we all see and observed on individual customers. And that is what we have reflected.
So — and we don’t see an overall risk here. But it’s a timing topic. That needs to be take into account and we have done that, it’s fully reflected in our number.
Olivia Honychurch
Great. That makes sense. Thank you.
Operator
Now we have Michael Cohen from Deutsche Bank back in the line.
Michael Cohen
Yes, good afternoon. Sorry, that the line collapsed. So, as a follow-up on the export license, as 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 there 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 custom and related delays? Again, not sure whether this was answered already? Is that more technical reasons for or what was the reason for those delays? Thank you.
Felix Grawert
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 soft 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 stop it up. Now, I think we are preparing now for the topic remain for a while.
So at some point, we will get the licenses that we have now been waiting for, and we will wait for others, but we don’t — I think it’s a manageable topic, as just the lead time topic that we will take into account. But we don’t expect yet a fundamental issue or like a substantial topic, that’s my comment in the slide presentation.
The second question, relating is that with respect to the to the new U.S. regulation, we have of course looked into these new U.S. regulations in all depths and all detail. And we did that actually, with support of the very experienced through a 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 targeting the segments of AI and supercomputing, not the segments we are in our market segment is not affected.
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 exercise 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 these changes in our current business behavior.
Does that address your question?
Michael Cohen
It does, indeed. And on the customer related push out, your want to phrase it?
Felix Grawert
Yes, from the customer related push out, we had these effect that in one particular market segment, this was the segment or a 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.
Michael Cohen
All right, and then maybe one more question on the more of financial side, you’ve obviously built up quite a lot of inventory over the past nine-months. Can you quantify roughly what amount of working capital reliefs you expect for the fourth quarter?
Felix Grawert
Yes, I cannot — I call Christian here, to talk more on this segment, but we surely expect our inventories to go back to just the run rate we had before, which has the build up here of inventory in the quarters purely driven by this push of shipments from Q3 to Q4. And it’s also correlating with the receive 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, the 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.
Michael Cohen
Absolutely. Thank you then very last question promised on the Micro LED sites, 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 businesses. Is that correct?
Felix Grawert
Yes, thank you very much. We see the market at large preparing for the 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 was formally engaged in LEDs, but even also the very big consumer electronics giant. Everybody is working currently on Micro LEDs. As you rightfully say the majority of these players are 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.
Michael Cohen
Perfect. Many thanks.
Operator
And the next question comes from David O’Connor from BNP Paribas.
David O’Connor
Good morning. Good afternoon. Thanks for taking my question. 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?
Felix Grawert
Okay, yes, let me clarify this. In fact, we need to apply for export licenses for all shipments, which is not going or which is going outside of Europe, outside of the United States and outside of Japan. That means, in other words, we need to apply for shipments which go into semiconductor, big semiconductor market such as Taiwan, Korea, China, and so on and so forth, all these requirements export line. So this is a vast majority of our revenue that goes through an export line.
And this is also the reason why these delays that we have experienced now had a visible effect in the P&L. However, we don’t expect this as an overall issue.
David O’Connor
Very clear. Thanks for that. And maybe as a follow up question, on the Micro LED Side, can you talk to the intensity of discussions with the potential Micro LED customers? You have one that you’ve outlined before is preparing for volume products? What’s kind of the Delta there in terms of timing, versus kind of the type of discussions you’re having with other customers. That will be helpful. And also, if you could tell us the percentage of Micro LED orders? That’d be useful.
Felix Grawert
I’m not sure whether I got your question in full. With one customer we are preparing for a volume ramp in or volume shipments of extra tools in the year of 2023. This is also what we had indicated at an earlier point in time. With other customers we are working on different market segments different application segments, which may come at a later stage. We don’t know exactly whether this is towards the end of ’23 or ’24, this depends largely on the technical progress that our customers are making. So I could not give an exact timing at this stage.
And I think the second part of your question was on the share of Micro LEDs? Let me have a look on that one. Let me look at my data what I have here, whether I’m able to get that out for you.
I think for the full year of ‘22, Micro LEDs will be somewhere in a double digit percentage range for us of our share of revenue, maybe around 15% for the full year ‘22.
David O’Connor
Thank you, that’s very helpful.
Operator
Next up is, Jurgen Wagner, from Stifel.
Jurgen Wagner
Yes, good afternoon. Thank you. AIXTRON on silicon carbide, two more questions. Your new machine? How should we model your market share your equipment market share? Next year and longer term? I mean, silicon carbide and what can you say on increase, and their yield issues? Do you see any impact on your equipment rollout with them?
And another one on your order backlog. You mentioned €369 million? How much of that would you consider as being exposed to cyclical risks or the push outs you refer to with your red, orange, yellow customers? And last one, the tax rate keeps falling or going down? What should we model for Q4? Thank you.
Felix Grawert
So there was a number of questions. Let me take them down. So, the silicon carbide market share, I think we have a good chance of next year of approaching somewhere around 50% market share in silicon carbide, I think it remains to be seen whether we are slightly below or slightly above this number, I have looked at the most recent data, but very clearly we make very good progress in silicon carbide, to give you a rough indication.
Now, the second question you asked was relating to Wolfspeed who published their results yesterday, I cannot comment on the topics that they are experiencing in their substrate production or wafer making steps. This is a step which is not related to our equipment. So I don’t have any insight from that one, and I can’t comment on them.
Jurgen Wagner
And the last question, I thought was that you were asking which part of our backlog is exposed to the red, orange, yellow to the market segment, which was experiencing some disturbance. This is a very minor share. I don’t have the exact numbers, but I would call it and the grand scheme of things that would be close to negligible.
Jurgen Wagner
Okay, and the others you don’t see any technical risks?
Felix Grawert
And we don’t see any technical risks. No, in fact, this is a very good question. We do see that the customers on the power electronics side and you know power electronics, both gallium nitride and silicon carbide is continuing their investments, the consensus, the confirmation, we also hear from our customers, despite the overall economic situation, simply because there is such a high demand now driven by the electrification of everything. Yes, electrification of mobility, E-vehicles, but also by the drive for energy efficiency, which is the main driving force behind gallium nitrides. So we expect these trends to continue.
Jurgen Wagner
Okay, and the final one was on that the tax rate in Q4?
Felix Grawert
Yes, that one, I will take. As with — it’s recommended in the past, I would recommend utilizing the 15% tax rate that accounts for utilization of tax loss carryforwards. It does not include changes in deferred tax assets. That’s anyway very difficult to predict. So that’s what I would recommend you use for your models.
Jurgen Wagner
Okay. Thanks a lot.
Operator
The next question comes from Martin Marandon from Oddo BHF.
Martin Marandon
Yes, thank you for taking my question, just a clarification on the sales guidance. You said that the lower end of the range of what’s like the risk of not having the export licenses in time. And so without that you probably have guided to what may be the high end of the range? That’s my first question.
Felix Grawert
Yes, thank you. Very good question. So, the high end offers the range is achievable if none of the risks is materializing. And the lower end takes into account all potential risks that might be conceivable. One risk you just mentioned, this is the risk of export license licenses, a timing topic, timing delay topic. And the other risk, which we have taken into account for the lower end of the revenue guidance is customer push out.
For the following reason, we see an area of power electronics that customers are building completely new fabs, really with construction going on, entire new steel structures or concrete structures are being erected.
And due to the overall global supply chain topic, not on our side, but on the customer side, some of these constructions are very well on track, all of them continue. So this has nothing to do with the economy or anything, all of them continue. But we do see that some customers have some challenges with their project plans. And it could be that one of the — one or two of these fabs may experience a delay of one or two months and some tools move from December to January or from December to February. And this risk, we also have included in the lower end of the guidance.
So this does not affect the overall trend. But it’s something that we have taken into account. And therefore at this point of the year, we have an unusually large range of revenue guidance.
Martin Marandon
Okay, very clear. And on the topic, we saw Wolfspeed warned yesterday on supply chain issues, is that related to what you say then customer push out and supply chain constraints?
Felix Grawert
Well, I cannot comment on the detail of Wolfspeed. The reading the understanding I got from reading the transcripts myself as a third party, so to say, is that this has to do with technological topics and their production process. And it’s my understanding and my interpretation from what I read is correct, then we are completely independent and not affected with that.
Martin Marandon
Okay. And just one last question. Silicon carbide was very strong this quarter, do you expect the next two, let’s say silicon carbide to be higher than gallium nitride orders in the next few quarters in the next few years. So there needs to evolve into it?
Felix Grawert
I think the two of the both of the materials — these materials will continue to be very strong. I don’t have exact numbers ahead of me or in front of me that I could say the one is stronger than the other. That remains to be seen.
Martin Marandon
Thank you very much.
Operator
The next question comes from Lee Meyer from Lord, Abbett
Lee Meyer
Hi, I have two questions. The first question is, when did you first become aware of the export license issue? Which would possibly impair or delay your shipments in the quarter? And why did you choose to wait until now to sort of communicate this to the market?
That’s my first question. I have a follow on.
Felix Grawert
Well, as I mentioned before, we are obtaining export licenses for the majority of our business it is not new, that there has been delays with some topics. I think if you have followed us, you will have seen that also in past quarters over the last year that has happened once in a while.
And therefore, we have not seen any need to communicate this to the market especially as we are very confident that we will stay within our overall guidance which we have reconfirmed and even increase.
Lee Meyer
Okay. All right. Understood. And then just in terms of these new responsibilities that you talked about, the authorities being given additional tasks, as you stated. Why do you think these additional tasks are arriving now? Is there a change in the overall climate that sort of sympathetic to what’s coming out of the states? Why the additional tasks? Now?
Felix Grawert
I think you need to ask you need to ask the decision makers within the government who will make their top down allocations. This is beyond what we can say. We can only pass on here to this group of we learn of what we learn of what we have been told, by the counterparts with whom we are working closely together, who have signaled to us that there is additional work within the authorities, which is consuming bandwidth, and who have indicated to us, hey AIXTRON, we will have less bandwidth available for all goods being exported out of Germany. That means, with the same team size, having more work to be done, that means you may need to wait a little longer one once in a while.
That, all I can tell you that all information I have.
Lee Meyer
Okay, understood. Thank you.
Operator
The next question comes from Olivia Honychurch from Jefferies.
Olivia Honychurch
Hi, thanks for taking another question. Just on this new family of tools, the new portfolio that you mentioned, Felix, can you give us an idea of what the impact will be there on the gross margins for the group? It sounds like it’ll be incrementally positive. But just wondering if you’ve previously said that you’d expect your group gross margins to get to about 45% in the medium term. Does that guidance already take into account this new portfolio of tools? Or would you look to upgrade that that outlet given potentially incrementally positive impacts from the new portfolio? Thank you.
Felix Grawert
Thank you very much. Very good question. We, in fact, expect that the gross margin of the group will gradually improve, as our new portfolio elements will take more and more share of our total revenues. This comes simply from the point about the new product into which we have invested a tremendous amount of time, effort and R&D, come along with much higher productivity than the previous generations, also with better uniformities, better performance of the individual product. And that, of course, can also reflected in the gross margins of each of the individual product. For sure, the R&D investment needs to pay off at some point.
And for the timing, which you’re asking for. I don’t have the financial model ahead of me that I could tell you, that largely also depends how fast the new portfolio elements will take all the share of revenue, as we have seen as a silicon carbide which we have launched this quarter, that was a very positive start. The other members of the family we will be launching in the first half of ‘23. And I think we can expect throughout ‘23 them to take a relevant share of the group revenues then much more unfolding throughout 2024. And when that is coming, yes, for sure the gross margins will increase. Nevertheless, I would not want to quantify that effect today here in this call.
Olivia Honychurch
Okay, that’s fair enough.
Felix Grawert
Okay, thank you very much to all the listeners and questions who asked questions. So that we will close today’s call, please contact us at IR, if you have any remaining questions. We’re happy to discuss to find our contact data in results.
Thank you very much. All stay safe. Bye-bye.
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