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Aixtron (AIXG)

Q1 2013 Earnings Conference Call

April 25, 2013 9:00 a.m. ET

Executives

Guido Pickert - IR Director

Martin Goetzeler - President and CEO

Wolfgang Breme - CFO

Analysts

David Mulholland – UBS

Sumant Wahi – Redburn Partners

Christian Rath– HSBC; Analyst

Sandeep Deshpande – JP Morgan

Simon Schafer – Goldman Sachs

Jed Dorsheimer – Canaccord

Edwin Mok – Needham & Company

Janardan Menon – Liberum Capital

Operator^ Good afternoon ladies and gentlemen. Welcome to Aixtron's Q1 2013 results conference call. Today's call is being recorded and I would now like to hand you over to Mr. Guido Pickert, Director of Investor Relations at Aixtron, for opening remarks and introductions.

Guido Pickert

Thank you Operator. Welcome, everyone, to the first-quarter 2013 results conference call of Aixtron SE. Thank you for attending today's call.

My name is Guido Pickert, Director of Investor Relations at Aixtron SE. With us today is our new President and CEO, Martin Goetzeler, who had joined the Company on March 1st 2013, a warm welcome for him.

As always, I also like to welcome our CFO, Wolfgang Breme. Hello.

Martin will begin with a business update detailing where the focus of Management's attention will be over the next few months and where we see Aixtron over the longer term. Wolfgang will as usual give you an update on the operational and financial performance of the business.

As the Operator indicated, this call is being recorded by Aixtron and is considered copyright material. As such, it cannot be recorded or re-broadcast without express permission. Your participation in this call implies your consent to this recording.

As with previous results conference calls, I trust that all participants have our results presentation slide, slide two of which contains the usual Safe Harbor statement. I will therefore not read it out loud but would like to point out that it applies throughout this conference call.

You may also wish to have a look at our latest IR presentation, which includes additional information on markets and technologies. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or transcript on our website at some point after the call.

I would now like you – like to hand you over to Mr. Martin Goetzeler, Aixtron's President and CEO, for opening remarks. Martin?

Martin Goetzeler

Many thanks, Guido, and welcome from my side. Since this is the first time that I'm talking to you, as CEO of Aixtron, I also would like to share with you some thoughts about why I joined this Company and where our priorities are over the coming months.

During my first seven weeks in the Company, I have worked closely with my global management team, visited all our facilities and have met with many customers in all regions. My goal was to quickly get a comprehensive view on the business, on the market, on the customers, on the technology and on our team.

The initial actions taken, therefore, relate very much to our operational opportunities, which I will point out later. Regarding my strategy, I would still ask for your patience during my first 100 days in office. Let me now start with an update on our financial situation, as well as an overview of some of the major market developments we are seeing.

The first quarter in 2013 proved to be a difficult start into the year. Revenues were at EUR40.2 milion, 4% lower than the revenues we recorded in Q1 2012, and 48% lower than Q4 2012.

Taking the uncertainty in demand into account and considering the technological progress of our product portfolio, we have executed another assessment of our inventories. Consequently, we have written down our inventory substantially by EUR43 million, including the shipment out of stock we had an inventory level of EUR74 million, as of March 31st 2013.

In addition, we recorded expenses of slightly more than EUR6 million for restructuring, also realigning the workforce to the business volume, but keeping the necessary flexibility.

Our cash and cash equivalents developed positively and are up by EUR10.4 million from EUR209.5 million at the end of last year to EUR219.9 million at the end of March 2013. Our free cash flow came in at EUR9.3 million, as already pointed out earlier this year, cash flow remains our major focus. We have generated orders of EUR29 million in the first quarter, which continue to be at trough levels. And we have now seen six quarters of orders around EUR30 million level – they remain euro level.

This is certainly not what we would have liked to see, given the early signs of overcapacity reduction evidenced by increasing utilization rates. However, this did not translate into meaningful new orders in Q1 2013. Nevertheless, the end markets of our customers developed positively.

In the consumer or residential lighting space, we have seen price reductions now announced by Osram, selling a 40 watt equivalent LED light bulb for less than EUR10, starting in June in Germany, as well as Cree's announcement that they would sell a 40-watt equivalent LED light bulb in the US for less than $10.

These initiatives, amongst others, will increase awareness, which again should be followed by a strong adoption and increasing LED penetration within these markets. This increasing LED demand in turn should help to drive capacity utilization up – utilization rates up at our customer steps to sustainable levels of 90% or higher, which we believe are the levels at which manufacturers consider investments into new capacities again. At the moment, capacity utilization rates of major LED manufacturers are in between 75% and 90%, driven by strong demand from LED backlighting and increasing demand from LED lighting with the latter expected to be the major growth driver going forward.

Currently, we are seeing more quotation activities from LED manufacturers. Nevertheless, due to the uncertainty in MOCVD equipment demand and the low visibility going forward, it remains difficult to provide any details on the development of the remainder of this year.

Despite the short-term challenges, the potential for Aixtron in the LED market was one of the reasons that attracted me to join this Company. Not only does Aixtron have the competence in highly sophisticated technologies for LEDs, I also see a great potential for Aixtron to position technologies in other areas, such as for organic materials, including organic LEDs. This technology offers great potential in a number of markets, such as display applications, lighting, plastic electronics or photovoltaics.

In addition, I also expect major opportunities and other deposition segments, including production equipment required for silicon semiconductors, power electronics and carbon material-based applications.

My initial impressions that I have joined – are that I have joined a company – a high tech company with a strong reputation for its technological capabilities and innovative spirit.

Despite these strengths, we cannot escape the current weak market environment. Hence, my initial focus as CEO has been on quickly enhancing operational efficiencies within Aixtron. Here are some of my initial actions taken.

We are strengthening our customer focus. I want us to be closer to our customers, to not only know their future needs but also to support them being successful. I strongly believe that if they are successful, so are we. Several initiatives have started.

We will further be building on our technological strengths, focusing our projects on innovation and productivity defined in close collaboration with our customers. As I said before, the opportunities for Aixtron are substantial, not just in the LED lighting market but also in areas, such as power electronics, silicon semiconductors, organics or next-generation carbon-based materials, such as graphene.

The dialog with customers has been intensified. We are increasing the efficiencies in R&D and the supply chain by streamlining processes and the related workforce. After adjustment in the US and the UK, we are currently adjusting the headcount in our German organization. The respective measures have been initiated.

To return to profitability, we are reviewing our product and service portfolio and set further cost reduction targets. In addition, capital expenditures and discretionary spending are being monitored tightly.

Let me emphasize, I'm targeting to develop the Company into a lean and powerful structure that is able to operate profitable throughout volatile business cycles. At the same time, I know that we will need to be agile and adjust the execution of the Company strategy towards our fast-changing market.

With this, let me now hand over to Wolfgang.

Wolfgang Breme

Thank you, Martin, and good afternoon to everybody on the call. Before I go into details, I believe it's important to explain the background of the ongoing restructuring, as well as the latest inventory write-downs.

The market is clearly not going in our favor. And with visibility still weak, we, as a management team, have decided that we need to be more prudent than ever before. This will help us to quicker regain profitability and also to win back the trust of investors and other stakeholders of the Company.

Let me start with slide four and our income statement. Revenues for the first quarter 2013 came in at EUR40.2 million and were 4% lower than the EUR42 million of Q1 2012.

Gross profit for the first quarter was at minus EUR47.7 million, largely due to one-off effects totaling approximately EUR46 million. This, basically, comprises expenses for staff reductions, as well as necessary write-downs on inventory we identified due to the weak demand and technological progress of our tools.

The gross margin was additionally affected by low utilization of our production facility, as well as lower product margins. Therefore, we, also, provided for other volume-related risks.

As Martin all ready pointed out, we are very much focused on optimizing our cost structure, and we have initiated cost optimizing programs throughout the organization. This will significantly lower our fixed cost base and enable a lower EBIT breakeven point. In order to increase our operational agility, we are targeting a breakeven point now below EUR250 million in a normalized year going forward.

For the first quarter, selling and administration expenses have remained flat year on year at EUR12.3 million. Reductions in headcount and other – and lower consultancy expenses compensated for the restructuring expenses included in the Q1 2013 figure. In the coming quarters, we will continue to optimize our cost structure and keep our focus on future market opportunities.

In the first quarter of 2013, R&D expenditure at EUR16.6 million remained stable, compared to the R&D cost of EUR16.4 million in first quarter of last year. Nevertheless, we initiated improvements in process efficiency also in this activity. Overall, we recorded restructuring expenses totaling EUR6.1 million in this quarter.

Mainly due to our restructuring costs and the provisions made, EBIT in Q1 fell year on year to minus EUR76.3 million, compared to minus EUR18.3 million in the first quarter of 2012. The net result for the first quarter was minus EUR76 million or EUR0.75 negative per share, compared to minus EUR12.3 million or minus EUR0.12 per share in the same quarter last year.

The decrease in earnings was largely a reflection of three factors. One, continuing weakness in the LED market, which is impacting sales and gross margins. Second, one-off write-downs on inventories totaling EUR43 million. And third, one-off restructuring expenses totaling EUR6 million.

In addition, orders remained low at EUR29.9 million, which is basically where orders have been for the past six quarters. Consequently, the total equipment order backlog of EUR78.4 million, as of March 31 2013 also remains low; it was 6% lower than the 2012 opening backlog of EUR83.8 million, as of January 1st 2013.

Please note that the US dollar denominated part of both our 2013 equipment order intake and backlog are recorded at the current 2013 budget exchange rate of $1.30 to the euro, compared to a rate of $1.40 in 2012.

Let's now move to the next slide, our balance sheet. Despite the negative results, Aixtron still has a strong cash balance of EUR219.9 million in cash and cash equivalents, including cash deposits, therefore no financial debt, and an equity ratio of 78%.

Our cash position of EUR219.9 million at quarter-end was broken down into EUR113 million of cash in the banks and cash equivalents with an additional EUR106.4 million on deposit with a maturity of more than 90 days, which was classified according to IFRS as other financial assets. Compared to the EUR209.5 million we had at the end of December 2012, cash at the end of the first quarter was up by EUR10.4 million.

The other figure I would like to draw your attention to is the level of inventories on the balance sheet, which at the end of the first quarter totaled EUR74.1 million; this is 41% lower than at the end of the last quarter with EUR126 million, mainly due to the inventory write-downs in Q1 and shipments out of inventory.

Let's now move to slide six, the cash flow statement, for some quick comments on that. In Q1 our operating cash flow was at EUR10.1 million, compared to minus EUR0.1 million in Q1 2012, mainly due to customer payments made on our receivables and customer advance payments we received, combined with lower supplier payments because of shipment out of inventory.

Free cash flow in Q1 was positive at EUR9.3 million, compared to minus EUR5.6 million in Q1 2012. This is a reflection of sales out of inventory and lower capital expenditure.

The next slide, seven, gives a good overview of different splits of revenues, mainly by type, of tool, by application and by region. 73% of Q1 2013 revenues were for equipment, the remainder for staff and services.

The majority with 58% of our tools went into the LED industry, 3% for power electronics and 11% for silicon applications. On the regional basis, 88% of total revenues in the first quarter of 2013 were generated by sales to customers in Asia.

I would like to thank you for your attention. And with that, I'll pass you back to Martin.

Martin Goetzeler

Thank you Wolfgang. Let me give you a quick summary before I hand over to you all for questions. As I said earlier, we are seeing higher quotation activities, particularly from LED manufacturers, but visibility for orders remains low. As a result, we are currently not in the position to give either revenue or earnings guidance for the current year. In addition, as Wolfgang has explained, we have decided to assess our inventory, reflecting the current demand levels and the technological progress of our product portfolio. Consequently, we have taken write-downs on our inventories.

We have also taken also cost optimization measures in personnel and discretionary spending. My current focus is on customers, technology, operational efficiency and profitability. From my team, I expect a clear commitment on targets and a strong focus on execution, and you can expect the same from me.

To quickly emphasize my intentions, I want to position the Company for sustainable and profitable success, based on a strong balance sheet, as well as a robust business model that will allow us to return to profitable growth. I think it is also important to reiterate my initial impressions of Aixtron, therefore, a very strong team and a compelling technology portfolio with great opportunities ahead of us.

And with that, I'll pass you back to Guido before we take some questions.

Guido Pickert

Thank you, Martin and Wolfgang. Before we take questions could I ask everyone again to limit your questions to a maximum of two each time. This will allow more people a chance to have their questions answered. Thank you for that.

Operator, we'll now take the questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from David Mulholland from UBS.

David Mulholland – UBS

Hi, and thanks for taking the questions. It’s David Mulholland from UBS. And just, firstly, Martin, I wondered if you could give us your perspective, and I know it's quite early days, but on how big you think the size of the LED opportunity could be for Aixtron and obviously you've got a bit of a background here, and then I'll come back with a follow up.

Martin Goetzeler

Yes. So, you know a little bit about my history, maybe. You know I worked in the lighting business. And this is exactly the wave we are expecting next. And if you look, I think the continuous reduction of LED prices, the governmental policy changes and also efforts from the supply chain have all contributed positively to increase the momentum for LED lighting. And this is across professional and also the residential segment. Nevertheless, the market has yet to evolve into the mass-adoption phase.

May I expand a little bit on the different market? Users in the professional segment are often more aware of the benefits of the LED lighting, in terms of total cost of ownership or even flexible designs. And due to this advantage – due to this, they can, basically, evaluate better the advantages, particularly since LED is a point light source and it gives – it's a directed light, and therefore it gives, for certain applications, like street lighting, like also shop lighting, where you need spots or down lights, or, of course, also, for architectural lighting, you see major benefits coming from the LED. In this area, we also see all ready picking up significantly the market.

You'll also hear, here and there, from retrofit fluorescent lamps. These are primarily used in high-maintenance cost areas that require long lifetimes.

On the other side, in the residential area, I think the inflection for it really is driven by – also by certain price points. And I mentioned two companies now coming to euro or to dollar, introducing 40-watt light bulbs. We have to see, if this is the inflection point but this will, at least, support and drive further the penetration.

But to summarize, if you look at these two markets, they clearly have different aspects. What are the drivers for the deciders? If you look at the residential area – if on the residential, it’s really about the initial price, also quality of life, whereas for the professional side, it's TCO and replacement cycles.

So, to summarize, what I wanted to say is for this third wave in business right now, what I am again looking into more right now in detail with my team is when will – basically, which application achieves its inflection points, in order to drive the growth? Important, I believe, is to see that if the inflection point or the timing of the inflection really is depending on the application and its – but it's also depending on the region, since the competing (inaudible) technology prepares for.

David Mulholland – UBS

That's good. Thanks. And just a follow-up for Wolfgang. It sounds like you're – if my math is right, your EUR250 million breakeven targets, assuming getting gross margins back to about the 40% level. Is that correct? And how do you think you can get towards that level again, from where we are today?

Wolfgang Breme

Yes, I mean, I know the math – hi, David. We know the math quite well, so the model has not changed so significantly. So, you're absolutely right. We expect to go back to the 40% gross margin. They have currently – I think that the whole P&L, of course, is heavily inflected by those unusual items. The main factor is – or two main factors, first of all, was getting the gross margin back, by increased efficiency, especially in the production facilities, once the volume increases, at the same time, getting our costs in those areas down as far as we can, as well.

Secondly, we are targeting operating expenses in the range of EUR100 million as well. On EUR105 million, this will bring us back to the levels of EUR250 million breakeven. If you remember in Europe – and then, in previous year, our operating expenses were more in the range of EUR120 million to EUR130 million. So, we are currently undergoing a cost reduction program in operating expenses and other fixed and variable expenses in the benefit to site, purchased material and components of around 20%.

The same applies for a headcount reduction in all sites across the board, or across all countries and locations, in total ,also, 20%, compared to the start of Q4 of 2012. So, this – those measures, which we have initiated should bring us then back to the EUR250 million breakeven. And, I believe, we are quite on track to achieve that.

You know that of course certain actions in certain countries take shorter or longer timeframes. But we are mighty comfortable that maybe in the second half, to the back end of the second half of this year, we will have reached a cost structure in the business, which may give us a start into next year with those breakeven levels.

David Mulholland – UBS

Okay. Thanks very much.

Operator

The next question comes from Sumant Wahi from Redburn Partners.

Sumant Wahi – Redburn Partners

Hi guys. Thanks for taking my question. And welcome, Martin, to this company, Aixtron. My question was mostly to do with the comments made by a week earlier, your competitor. They have been fairly bullish about the demand they're seeing, especially in China. And I was just wondering why there is this difference, so to speak, between what you are seeing and what they are seeing. I mean, is it really share loss? Or are you just being conservative? That's my first question. And then, I have another follow-up.

Martin Goetzeler

As I mentioned in my talk, I – we also see some increased customer inquiry levels. And I can also say this is also in several regions. Nevertheless, based on our past experience, the conversion of inquiries into firm orders remains difficult to predict. And, therefore, I appreciate your understanding that we are not commenting today on explicit order dynamics going forward.

Sumant Wahi – Redburn Partners

Okay, fair enough. And then, I had another follow-up, maybe from an LED lighting perspective. From what I understand, probably maybe a limited amount on how the LED lighting space works, I believe that the Korean and the Taiwanese, or the non-Chinese players, including the Europeans and the Americans, seem to have a better technical capability of making high-brightness LEDs, compared to the Chinese players, who are still working mostly for mobile and probably TV backlighting, to a certain extent.

So, my question was that if LED lighting demand is going to be a next big driver for MOCVD 2's, is it fair to assume that we could say that your market share could actually reverse, to a certain extent, from the losses that’s seen in the last two, three years, given the fact that you have a much stronger presence outside China?

Martin Goetzeler

What I would like to start with is actually that we see, clearly, that the tier one companies in the global market have a leadership position. And – but we also see that other region, other – basically the tier twos are trying and are working hard to catch up. So, the gaps are closing, actually, in some areas, quicker than we maybe anticipated a couple of years ago. Nevertheless, the tier ones are still ahead. And then, if you then start to look about, basically, in the different applications, there are many, many different approaches to lighting here.

For example, just to give you, there are areas or applications, where we really push hard in order to get the highest brightness levels to work with as lower number of LEDs as possible. And then there might be other applications where you basically work – and on – this is the first one I want to mention is made very heavily is street lighting; it's the directly light for shop lighting. These are areas, where you need a high brightness – a very high brightness level. Then, there are others where you might – where it's maybe not so decisive.

So, it depends really on the application, where the different players can play into. And, therefore, I see, basically, the – for us, very good opportunities, basically, since we are covering all the lighting, LED manufacturers globally. And ,therefore, it will not depend, basically, on the development in different segments.

On the other side, the more the high brightness part is considered, clearly, the tier one companies under the older scale, today have a very good chance.

Sumant Wahi – Redburn Partners

Okay. Thank you very much.

Operator

The next question comes from Christian Rath from HSBC.

Christian Rath – HSBC

Yes, good afternoon, and thank you. Just one question on the gross margin. You mentioned it was driven partly by other utilization costs and now a product margin. I just was wondering, if you can explain these two effects or quantify them more. Thanks.

Wolfgang Breme

That is rather hard. First of all, not so easy to – as I said before, we have write-offs of the inventory included, which are going through the P&L, in the range of EUR43 million, which have to be excluded. And then, we have other effects in the margin.

If you would clean up the margin, really, the margin would have been – the gross margin would have been around 16%, if you really would carve out everything, which you – that's so to say, which I would not like to have, and then a clean gross margin going forward. So, the gross margin would be around 16%. And the 16% also reflects, of course, an underutilization.

In total, it's not – so maybe the second half of the question, if you look at our product margins, completely regardless of all of the production facilities and inefficiencies, et cetera, it's not so much that the product gross margins are really bad. It's that the whole gross margin breakdown is distorted by several unusual items, so to say.

So, when I take everything out, it's 16%. But then, we still the – in the summary, we still have the underutilization in that. And going forward, as I said before, we are targeting gross margins, like in the past, around 40%. That's the target, going forward.

Christian Rath – HSBC

But not for Q2 or Q3, right, I see.

Wolfgang Breme

We're not giving a guidance per quarter at the moment. No.

Christian Rath – HSBC

Okay. Thanks.

Operator

The next question comes from Sandeep Deshpande from JPMorgan.

Sandeep Deshpande – JPMorgan

Yes, hi. Thanks for listening. A couple of questions from me. Firstly, on new product, maybe you can talk about – clearly, I mean, at this point – I mean, your competitor as well is talking about large – significant price pressure in the industry. One way to move away from this price pressure would be to introduce new product and with new technological innovations. Can you talk about a roadmap that will take you there, towards the new products, I mean, which will clearly interest your customers, in terms of productivity or any other metrics? And I have one follow up.

Martin Goetzeler

Hello, this is Martin.

Sandeep Deshpande – JPMorgan

Hi.

Martin Goetzeler

Yes. And, first of all, I think, as you mentioned, the price pressure is really, if we look at this chart market, we are really competing for every order right now. And that's clearly putting pressure in the marketplace.

On the other side, yes, we agree that new features and new – that the value add for the customer will also support a price improvement. And there are several aspects. But, I think – and I don't want to talk in too much detail – and I hope you understand this – but really it's all about the customer benefits.

We have to create – and this is what I also mentioned in my presentation at the beginning. We have really to work on the customer benefits. We have to present him with solutions, which have reduced his cost of ownership, and also improve his throughput. And these are aspects that we have to support him, besides other features, which will come in the future.

Sandeep Deshpande – JPMorgan

Thank you. And then following up, in terms of lighting, you mentioned that this is fairly young stage in the market with this, all ready seen lighting improve substantially, particularly some of the LED makers going into lighting are indicating, in terms of sales, that there are very strong trends at this point.

The question I have is how do you perceive – from what you're hearing from your customers – regarding, particularly in China, the utilization rates and how you see those utilization rates in China? I mean outside China, the data points are very positive. Does there still exist overcapacity, which will prevent a move towards more capacity additions later this year or early next year? Thank you.

Martin Goetzeler

What we hear is that – we call it tier one customers in China. The larger customers, are running at higher capacity than the tier twos. And, therefore, there's a little bit of mixed situation in China. But the larger ones are running higher, as I said. And, therefore, and as I mentioned in my presentation, I think it's really driven by both the backlighting and by the increased penetration in lighting.

Sandeep Deshpande – JPMorgan

Thank you.

Operator

The next question comes from Simon Schafer from Goldman Sachs.

Simon Schafer – Goldman Sachs

Yes, thanks so much. Just to follow up on this China discussion. I heard you say that utilization rates amongst the top tier are a little bit higher now. Is that a recent change and is it approaching the type of capacity utilization that we see before in Taiwan and Korea? Or it still significantly lower? It should be helpful, if you could frame that in a little bit more detail. That’d be great.

Martin Goetzeler

Can I repeat, if I got your question? You want – regarding the Taiwanese and the Korean market, you ask if there's a change in the utilization? These two markets I mentioned…

Simon Schafer – Goldman Sachs

In China.

Martin Goetzeler

The other two markets, Korea and Taiwan, they are running at higher capacities. Here, again, there is a difference between tier one and tier two in these countries. But on the other side, in China, clearly the utilization rates went up over the last couple of quarters. That's true. Yes. But because a couple of quarters ago, I simply – we also we’re talking about utilization rates of 50%. And this was clearly lower than we had – that then what we have today.

Simon Schafer – Goldman Sachs

Right. So, at which point would you see a threshold, in terms of utilization rates and upon which you would actually expect a far more – the positive indication? Is that a two quarter thing? Is it a three quarter thing? How are you thinking about that mix?

Martin Goetzeler

Yes, as I was saying, this is exactly where we – I – we still have issues with the visibility and therefore I really ask you for your understanding that I am not commenting on these dynamics right now.

Simon Schafer – Goldman Sachs

Got it. And my second question for you. Before you said that you're obviously undergoing a pretty significant review, and in fact you're all ready executing against some cost restructuring. But how much patience would you show, in terms of timing, before you start to think about something – doing something more strategic or structural, in terms of addressing your cost base, in case that, you know, your order run rate or your revenues don't see much of a recovery?

Martin Goetzeler

I think I'm already very much into strategic internal discussions. This is an ongoing topic. I just wanted to point out that I would like to have my hundred days in order to make sure that I get sorted out; everything in the right way and I'm really sure where the direction of the Company should be. And that's why I also ask you for your understanding.

Simon Schafer – Goldman Sachs

Sure.

Martin Goetzeler

Regarding the operational side, this – we took really quick actions in the first couple of weeks in order to take – to basically return to a more possible higher profitability. The – what we are doing now is really we are looking into the market very closely. And we will take actions whenever it is necessary. But we also need – and this I mentioned in my presentation – we need to keep the flexibility. So, whatever happens in the marketplace, we will be ready.

Simon Schafer – Goldman Sachs

Okay, great. Thanks so much.

Operator

The next question comes from Jed Dorsheimer from Canaccord.

Jed Dorsheimer - Canaccord

Hi. Thank you for taking my question. The market commentary, Martin, that you mentioned is very consistent with what we're seeing. However, your pricing strategy is inconsistent with a – increased utilization rates. So, I was wondering if you could comment on this strategy, in terms of offering very low prices for your tools. Is this a function of just cleaning out your inventory? Or is this something more systemic that's causing this? Thank you.

Martin Goetzeler

Thank you for your question. I – the situation in the marketplace – so, basically we have – it's a twofold. It's one – it’s what is happening short term and what is happening medium term. And when I talked about the pricing situation going forward, this is really in case of an upturn in the marketplace. And then, I think with also additional features that we will be able to achieve significantly higher pricing again.

Currently – and as I said, it's difficult for us to foresee, where the market is going in the short terms and then when orders or inquiries will turn into orders, therefore the situation is, for us, a little bit different in the short term.

Jed Dorsheimer - Canaccord

So, should we expect then that if in sort of this short period of time that we should start to see prices increase, as we look out maybe in the back half of this year providing utilization rate?

Martin Goetzeler

Sorry. You can trust me that we are looking into any opportunity to see a stabilized pricing situation. And it's – and we also – and this is maybe a little bit – we have to see a little bit more that's a balance. We are not just in the LED segment. We are also in some other segments, where the pricing situation is maybe a little bit – not as tense as we see it in the LED segment.

Nevertheless, I think this is exactly what we are working on, is also how we can, basically, optimize our pricing strategy, going forward. And this is what I mentioned also is our internal portfolio discussion.

Jed Dorsheimer - Canaccord

Okay. Thank you.

Operator

The next question comes from [Carl Elkin] from (inaudible).

Unidentified Analyst

Yes, hi there. Thanks for taking my question. Just following up on the last one, you mentioned the different gross margins in LEDs and non-LED sectors. So, in LED, you see gross margin currently above or below average?

Martin Goetzeler

Yes, as I tried to point out in the last response, clearly, the market right now in LED is a little bit more tense than in the other segments. And then – and that's why I would – I think we can say it's a little bit below right now.

Unidentified Analyst

Okay. And then, another question, on inventories, we have the euro number but can you give us the unit number? How many units you still have in your plant at the moment?

Wolfgang Breme

Hello. The answer is no. We are not giving any numbers in that respect for the moment because as Mr. Goetzeler said, we are currently undergoing significant reviews. And, currently, we're really looking at the inventory value.

Unidentified Analyst

Okay. That's fair enough. Thank you.

Operator

The next question comes from Edwin Mok from Needham & Company.

Edwin Mok – Needham & Company

Hi, gentlemen. Thanks for taking my questions. So, I guess my questions relate to your customer base, in terms of inquiries that you're talking about. Are you seeing a difference in terms of the customer from Taiwan, versus, Korea, versus China and North America? And you mentioned – as related to general lighting – are some of these customers more leveraged general lighting, versus other ones?

Martin Goetzeler

Really, the strategies of each of our LED customers is a little bit different. And therefore also they are – basically their end markets or their customer base is different. And so, we have customers who are working very much into the backlighting market, and others already have a higher share in the lighting market. So, basically that differs, and it differs also by region.

Edwin Mok – Needham & Company

Okay, okay. But you can't generalize it by regions? Or is it of – or customer by customer?

Martin Goetzeler

That’s – exactly. That you have to do. Yes. Because not everybody in each country is addressing the same segments.

Edwin Mok – Needham & Company

I see. Okay, that's fair. And then, can you give us an update on your silicon product, in terms of progress there and how should we think about that business this year? Are you – should we expect more orders for this business and potentially penetration, a lot of customers?

Martin Goetzeler

Yes, I think I'm quite happy with my silicon business. The ALD technology is now qualified for mass production at a Korean manufacturer for DRAM. And it's also chosen by NAND – for NAND flash manufacturer in another region for evaluation. So, we are making progress and make – basically creating the field for this new technology. And I think the customer really – they're really happy about it.

Edwin Mok – Needham & Company

Great, thank you.

Operator

The next question comes from Janardan Menon from Liberum Capital.

Janardan Menon –Liberum Capital.

Hi, thanks for taking my question. I just wanted to go back to the financial model a bit. You've said that EUR250 million is your targeted breakeven point, possibly by the end of this year or getting into next year, which implying a 40% gross margin around the EUR60 million, EUR65 million of revenue per quarter. I was just wondering, does the model allow for a higher gross margin, if your revenues were to go above EUR60 million a quarter? Or is it going to be more stable at those kind of levels, even if the revenue goes above that?

Wolfgang Breme

Let me start and to reemphasize the EUR250 million. So, we are targeting levels below EUR250 million, if possible. But coming back to the gross margin, as you know, a huge portion of our cost of sales are a variable or direct cost. So, we source; we don't have real production, ever since we sourced our equipment by component.

So, typically you would have purchased items in the cost of sales per tool around 75% or even more. So, we could expect that if we had seen that the Company to that EUR250 million and below breakeven level, that the increased capacity – we would happy to see that. We are not seeing it at the moment, to make it clearer. We would be happy if we would see that. But we – of course, this would not increase the gross margin because then we would have go back and even put more variable costs into the gross margin, meaning even outsource more.

So, the answer is clearly the gross margin, more or less, will be stable around the 40%, even if we would increase below that – above that. The target clearly is to make the Company, as Martin pointed out before, more flexible, so putting more and more costs into the variable segment. But again, this means that the efficiency does not increase. That would increase the volume.

Martin Goetzeler

And the leverage would come from the OpEx.

Janardan Menon –Liberum Capital.

And does that, in any way, reduce your ability to react to any kind of sudden improvements in orders, which may be at a higher revenue level than those kind of levels?

Wolfgang Breme

No, this must exactly not happen. That's the flexibility target we have given ourselves. So, the increased flexibility has to make sure that we can, again, cope with all market conditions, going forward, whether it's upwards or downwards.

Janardan Menon –Liberum Capital.

Okay. Just as a small follow up, which region does – are you getting the maximum amount of increased inquiries from? Is it between Korea, Taiwan and China?

Martin Goetzeler

If you ask me by region, actually as I mentioned, we see it in several regions. And these also include what you are mentioned.

Janardan Menon –Liberum Capital.

Can you give us one market, which is more than the others, between those?

Martin Goetzeler

This is – I apologize, but I appreciate your understanding that I don't want to further comment on this.

Janardan Menon –Liberum Capital.

Got it. Thank you very much.

Operator

Next question comes from Gunther Hollfelder from Baader.

Gunther Hollfelder – Baader.

Hi. Thank you. Given your background in the LED and lighting business, I was wondering whether you see any potential for the service business to grow at Aixtron. This would be a first question.

And the second question is for the restructuring charges until the end of the year, whether you could provide a guidance. And also concerning the advance payments in the quarter. I think they were up nearly EUR10 million, at an order intake of around EUR30 million. If you could just comment on your advance payment policy right now. Thanks.

Martin Goetzeler

Let me start with the service business. I think Aixtron already generates a stable revenue stream for spare parts and also service since 2010. The service organization, by the way, is following our customer base. And, therefore, it's really set up globally. It means it's close to our customer base.

For me, service is a key segment of our business model. I see this as a major opportunity going forward, and we will build on this. This is one of my actions I have taken.

Regarding the aspect of advance payments, Wolfgang will comment

Wolfgang Breme

Yes. Hello, Gunther. A quick comment on the advance payments. I'm tempted to say we are back to the good old days and the policy has not changed. We are targeting to get as much up front as we can, which wasn't always possible in the tense environment we are faced – we were facing in the last couple of quarters.

So, approximately, we have – we, currently – we have 30% what we can achieve currently, not in all regions and not at all customers. But that's the level of advance payments we are currently seeing in the quotation activities Mr. Martin has mentioned. So, again, it’s – the policy has not changed, in that respect. We are trying to get advance payments from our customers, as in the past.

Gunther Hollfelder – Baader

Great. And on the restructuring charges, is there any guidance?

Wolfgang Breme

Yes. The restructuring charges were EUR6.1 million. Let's call them in the narrow sense. That's mostly payroll-related restructuring charges. And we do not expect additional charges in that area, going forward. We believe we have done enough in Q1 to be able to cope with the restructuring requirements of this year.

Gunther Hollfelder – Baader

Okay, great. Thank you.

Operator

The next question comes from Uwe Schupp from Deutsche Bank.

Uwe Schupp – Deutsche Bank

Yes, thanks for taking the question. Yes, Martin, maybe a more general question, if I may. You come obviously from a company – from a very big company that has gone through some major portfolio restructuring and shifting over the last ten to 15 years. And I'm sure that this has coined yourself in a certain extent.

So, I guess my question is whether you see Aixtron – where you see Aixtron going forward. Do you see it really as a nearly pure-play LED company? Or would you rather imagine, also, to strengthen the other smaller units, like the silicon or especially the OLED business going forward or maybe even some of your new embryonic ventures, like carbon nanotube, for example?

And for Wolfgang, just a quick follow up. I just – I did not get that correctly; there's no further restructuring expenses from here. And what would you expect the headcount at the end? Thanks.

Martin Goetzeler

So, the point on, basically, the strategy, as I mentioned before, I really ask you to give me these hundred days in office. But I also want to reiterate, again, that clearly, one of the reasons also why I joined this Company is that we have these technologies with have the growth potential, the growth opportunities in the silicon area, in the power area, in the carbon nanotube. This is – these are focus areas, organics, I want to mention as well. These are clearly focus areas for the position. And we will evaluate, basically, over the next two months, and then we will decide on the strategy, going forward. Nevertheless this is a deposition company and this is currently our focus.

Wolfgang Breme

Hello. But a quick view – a quick look at the headcount. So, when we started the exercise, the headcount was north of 1,000 employees. And as we mentioned before, we're targeting a 20% reduction in headcount across all locations in total. So, this would bring us below 800. That's our target.

Uwe Schupp – Deutsche Bank

So, you are basically there already, although it may not be visible at the end of March, simply because there are people still on the payroll, which essentially have already left?

Wolfgang Breme

Yes. Of course, especially in Germany, it takes longer than, for instance, in the United States, where we are – where we all ready finished with our exercise. But in general, yes.

In an ideal world, I would not expect any additional charges. So, we have accrued for not only the severance payments, but also for the notice periods of the employees.

Uwe Schupp – Deutsche Bank

That's very clear. Thank you very much.

Guido Pickert

Operator, we have time for one more caller to ask questions. We will get back to all callers that have not asked their questions and give them the opportunity to have a chat with us.

Operator

Okay. The last question comes from Adrian Pehl from Equinet Bank.

Adrian Pehl – Equinet Bank

Yes. Hi, gentlemen. Good afternoon. Actually I have two questions left, first of all on the R&D level we saw in Q1. Obviously, you made some progress on a sequential basis, versus the two quarters before. I was just wondering whether you could share with us a rough estimate of what we should think of, the level for the full year.

And the second question is somewhat related to one of the questions being asked before, in terms of the strategy. I know it's a bit hard for you to answer. But I was just wondering whether you would see M&A as a means of positioning the Company on a more broader level. Thank you.

Martin Goetzeler

So, starting with your last question. M&A is part of the strategic activity of the Board, and therefore it's clearly in our focus all the time. And my approach to this is really to say, “Who is, for a business, the best owner?” And there might be businesses out there which better fit to Aixtron. And we are also seeing – looking, “Are there others, which might fit somewhere else?”

So, this is a continuous effort. But as I said, I really appreciate if you can give me these hundred days to come up with a concrete answer on this. And now, I'm done.

Wolfgang Breme

Hello, (inaudible). For the R&D, if you remember last year the R&D expenses were north of EUR72 million. And the cost target of 20% also applies, of course, for the R&D area, which is, of course, one of the most difficult areas to reduce cost. So – and we have, of course, in the current R&D numbers, which you see are – are now P&L now, , which is north of EUR16 million. There are restructuring expenses included as well.

We are targeting R&D costs in the future of – in the range of EUR60 million, so EUR15 million per quarter or below. And it is possible because we are very thoroughly analyzing our R&D projects, which as you know, R&D is, to a big extent, not only headcount but also a lot of project materials and experimental material costs, so we are very thoroughly analyzing our current R&D projects, and which will bring us maybe back to even below the EUR60 million range.

Martin Goetzeler

I would like also to expand a little bit here because what we are doing here, and we started – I mentioned it at the beginning – a project on R&D, where we really want to make sure that we'll have the most efficient processes. So, even if we might be a little bit below last year, we expect that from the output side, we can get to maybe even higher levels.

The second point I want to mention is we're also look into very much details how much R&D do we need for the different – for technologies? And therefore, this is also a process of allocating. So, basically, we are very much into this topic because this is really – innovation is the life blood of this Company, and therefore it's a very, very important activity.

Adrian Pehl – Equinet Bank

I understood the answer. Thank you, gentlemen.

Martin Goetzeler

Thank you.

Guido Pickert

Thank you. At this point, we will have to close the Aixtron Q1 2013 earnings call. Thanks for joining us and your questions. If you have any additional questions, then please don't hesitate to contact either (Andre) in the US or us here in Germany. Thanks, again, for your interest and goodbye.

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