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Aixtron SE (NASDAQ:AIXG)

Q3 2011 Earnings Conference Call

October 27, 2011 09:00 ET

Executives

Guido Pickert – Director, Investor Relations

Paul Hyland – President and Chief Executive Officer

Wolfgang Breme – Executive Vice President and Chief Financial Officer

Analysts

David Mulholland – UBS

Günther Hollfelder – UniCredit

Janardan Menon – Liberum Capital

Adrian Pehl – Equinet

Maxime Mallet – Natixis

Olga Levinzon – Barclays Capital

Andrew Huang – Sterne, Agee

Alla Gorelova – Steubing

Francois Meunier – Morgan Stanley

David O’Connor – RBS

Jed Dorsheimer – Canaccord

Daniel Amir – Lazard Capital Management

Jürgen Wagner – MainFirst Bank

Operator

Good afternoon, ladies and gentlemen, and welcome to Aixtron’s Third Quarter 2011 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 – Director, Investor Relations

Thank you. Good afternoon and good morning, everyone, and thank you for joining us for today’s call. On the line today are Paul Hyland, our President and Chief Executive Officer, as well as Wolfgang Breme, Executive Vice President and Chief Financial Officer.

As the operator indicated, this call is being recorded and is considered copyright material. As such, it cannot be recorded or rebroadcasted without express permission. Your participation in this call implies your consent to this recording. As usual, I trust that all participants have our results presentation slides available from the Investor Relations section of our Web site, page two of which contains the usual Safe Harbor statement. I will not read it out, but would like to point out to you 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 as many of you know. 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 Web site at some point after the call.

Let me now hand you over to Paul Hyland. Paul?

Paul Hyland – President and Chief Executive Officer

Thank you, Guido. Ladies and gentlemen, good afternoon to those of you calling in from Europe; good morning to those of you joining us from the U.S., and good evening to investors calling in from Asia. I’d like to welcome you on behalf of Aixtron’s Executive Board, to the presentation of our Q3, 2011 results. By way of introduction, let me say at the very beginning of the call that although the revised guidance news we gave you on September 15th does represent a disappointing set-back for our original targets for this year, it does not in our opinion, detract from the positive longer term market prospects as I have set out for you in previous calls.

There can be no doubt in anybody’s mind, that the LED lighting investment cycle will come and will be the biggest end market opportunity this industry has ever seen. It is not a question of “if”; it only remains a question of “when”. Remember that today, less than 5% of all lighting employs LED technology. The range of opinion as to what percentage this will be by 2020, varies from 50% to 80%

As we predicted the demand from LED backlighting has slowed significantly as the quantity of equipment installed represents, in all likelihood, close to 80% of the projected MOCVD equipment requirement for this application. So, if we wanted to be brutally realistic, to all intents and purposes, we could argue that the investment cycle for backlighting is all but over, but conversely; we could also say; the investment cycle for LED lighting has only just started.

In the course of the last 12 months, the gap between these two major investment cycles has been bridged to some degree by the significant increase in government subsidies for MOCVD equipment purchases, particularly in China. However, evidently, this bridge is rather more precarious than we might have liked, but that is principally due to a combination of financial volatility pressures and some regional side effects arising from the speed at which that bridge was built.

When I spoke to you during our half year call at the end of July, I talked openly then about the choppy waters we had seen in Q2 and the reasons behind the uncertainty we had detected in some customers in Asia. We also said then that we expected those choppy waters to continue into Q3. It turned out that our predictions have come true in a rather more dramatic way than even we had anticipated. But I will stress again today, as I did in July that this market correction linked to the transition between two investment cycles rather than a negative secular trend. We certainly did not expect the degree of deceleration we’ve seen since July, but, even so, the severity of the market correction represents a delay, not a disaster. Neither does it detract from the significant market opportunity that lies ahead.

First though, I am going to take you through the key elements of the third quarter and address in more detail the influences behind our decision to revise our guidance for the full year 2011 on September 15. Then I will ask Wolfgang to take you through some more detailed aspects of our financial performance and to expand on our flexible business structure that is a key element in our strategy during this period of a current uncertainty.

Finally, I will close the presentation by explaining our 2011 guidance before we open up the call for questions. Let’s look at those key elements on slide three. If we look at the sequential quarterly comparison on this slide, you can see the immediate effect of the rapid deceleration I described earlier. Revenues decreased by 49% from €175.6 million in Q2 to €89.8 million in Q3. This sudden decrease in revenues is principally down to a small number of significant customer delayed deliveries, which affected our gross margin performance, which came down from €76.9 million or 44% in Q2 to €38.7 million or 43% in Q3, a decrease of one percentage point over the prior quarter. Those systems which have been built but not shipped, have been recorded as inventory and are reflected in the balance sheet accordingly, which Wolfgang will talk through with you later on. You can see the effect of all this on our reported EBIT in the quarter, which at €620,000 or 1% of sales, is a significant drop from the 31% we reported in Q2 2011.

Clearly, our Q3 EBIT was strongly influenced by the reduction in sales volume but also by the substantial currency effects we recorded in the quarter. Wolfgang will expand on both of these effects later on.

As I’ve already said the principal reason behind both, the decline in revenues, EBIT and margin in the quarter and the decision to reduce the guidance given for 2011, is due to the extent and the speed of which the number of customers particularly in Asia have adjusted their delivery requirements in this period. Artificially high demand driven by substantial government funding has led to an unscheduled but significant slowdown in demand. We don’t believe that these customer adjustments necessitate a change to our positive view of the longer term momentum we see bringing the LED market closer.

We perceive these adjustments to be market driven correction to the very aggressive growth targets being pursued in the number of the more prominent Asian markets. These aggressive targets have been coupled with some predictable growth pain issues including customer difficulties in recruiting appropriately qualified personnel, technical inexperience, greater competition for local subsidies, delay in fab completions amongst other issues. To which we can add that we are also beginning to see evidence of capital and financial market pressures many of our customers are experiencing including both sovereign and bank suppression of credit lines and bank loan availability. That we should have been affected first by this market correction should not be a surprise. We are in the front carriage of the food chain. These combined pressures come in parallel with the LED end market price declines of 10% to 15% a quarter, and the fact that there is just not yet the level of end market demand required to support some of the plans in place.

For our customers, I could imagine it could even get worse before it gets better. We’ve already heard rumors that suggest an inevitable degree of consolidation will take place. In the past, we’ve talked about a natural digestion phase that the market goes through, while the new MOCVD equipment capacity is brought on line. We could perhaps refer to what we’re experiencing today as an indigestion phase.

Let me conclude my comments on the drivers of these recent developments by reiterating that this correction is not a market risk per se, it’s a revenue timing risk. Let me now move on to talk about the effect of this correction on our order intake and the current order backlog. Our order backlog at the end of Q3 stands at €245 million, which is €29 million less net of the €100 million adjustment implemented on September 15, which represents 10% sequential reduction in the adjusted order backlog. The decision to reduce our order backlog by €100 million was taken after intense consideration of the rapidly changing circumstances, we found ourselves in and as a result of our desire to reestablish stable and prudent ground for our order backlog.

We have explained and maybe even boasted in the past of the prudent way in which we recognize order intake and consequently the perceived robustness of our order backlog. It will be true to say that despite this prudent approach, we have been surprised by the unprecedented suddenness with which some of our customers have announced radical alterations to their impending investment plans. It would be sensible to acknowledge in hindsight that with new players often comes a new ball game. We will reflect on this development and revisit our methodology for assessing risk in the future.

Cash remains relatively stable at €318.6 million, which represents a 7% reduction on the prior quarter and is principally due to lower advance customer payments. Our consistently positive financial results enable us despite the current market difficulties to continue to invest extensively into new products. We’ve increased our R&D head count by 13% in this quarter and our state-of-the-art R&D center will be close to completion by the end of this year.

The product range that we offer the market today offers both cutting edge technology and competitive cost effective solution for our customers. We also have a very comprehensive pipeline of new product developments work in progress, which will continue to address the changing needs of our customers to produce the highest quality devices at the lowest possible manufacturing cost.

To give you an example, the latest version of our showerhead MOCVD system, the CRIUS II-L, represents the largest available capacity MOCVD reactor with the lowest cost per wafer in the industry. And in addition to new products we also have a steady stream of exciting new product enhancements in the pipeline that we will be releasing in the near future. The perennial question of market share is, and always will be a focus of attention for many, including ourselves, of course. The regular fluctuation in market share between ourselves and our principal competitors will always be a topic of avid interest and is a sign of a healthy market. And I am in no doubt that these new products from our R&D team will reinforce and traditionally very strong positioning in all of the markets that we address. We are, of course, not unfamiliar with the volatility of these markets and we’ve been stressing for several years the importance of the operational flexibility and the financial strength that are essential characteristics of the Aixtron business model.

On an operational cost control level, we are continuing to exercise the business flexibility that we’ve developed to be able to reduce cost rapidly when necessary and we have already initiated a number of cost reduction measures and ensuring that the margin effect of a reduction in volume is minimized.

Let me now hand you over to Wolfgang for a more detailed look at our financial results. Wolfgang?

Wolfgang Breme – Executive Vice President and Chief Financial Officer

Thank you, Paul, and hello to you all ladies and gentlemen. As usual I will concentrate on a few numbers to illustrate the points that have already been made and which may help you to understand the way we are likely to perform in future months.

Once again, I’d repeat what Paul has said, we are looking at delay not a final stop, the business opportunities are more than healthy. Let’s look first at the profit and loss account on slide four. The sequential quarter-on-quarter numbers reflect the unscheduled slowdown Paul already talked about. Q3 revenues are down to €89.8 million, Q3 gross margin down to 43% due to slightly higher relative cost of sales after the sudden decline in revenues. This sounds drastic but please let me share a longer term view with you. Gross margins have increased gradually from 37% in 2006 to 53% last year. You will agree with me that the current 43% in the quarter or 47% in the nine months period are all but bad. Because of our U.S. dollar euro exposure, it’s always worth mentioning that the volatility of these currencies have an impact on our gross margin.

SG&A represented 16% of sales in the quarter, 11% of sales in the nine months period. Just for reference, in 2006 this ratio was 24%. Again, you will agree that the current cost structure is still lean compared to where it was just a few years before. We are currently reviewing our cost base and exercising our operational flexibility. We will at any time retain our ability to meet customer needs including any sudden upswing in demand. However, while we would not want to hide this from you, we have always said that we do not manage the business on a quarterly basis.

Total operating cost increased quarter-on-quarter by almost €16 million to €38 million in Q3 2011. This increase in operating cost in the quarter was mainly due to the adverse effect of a strengthening U.S. dollar towards the end of the quarter leading to a currency related expense of €12.4 million principally from mark-to-market of U.S. dollar hedging contracts and currency transactional and translation differences. If we would do the same valuation as of today after last night’s event here in Europe, this would have by the way we’ve been positive for the P&L. This is how fast currencies are changing those days.

€0.5 million of R&D grants received in Q3 2011 were recorded as other operating income. This said the operating expenses excluding the currency losses in the quarter would be a €25.6 million compared to €27.2 million in the previous quarter. The operating result came in slightly above breakeven at €620,000 with a 1% EBIT margin. As we’ve already said the decline in performance was due to the lower revenues, a still high cost base in the cost of sales area and increased currency effects. Again, pre-currency effects the EBIT would have been €30 million or slightly above 14% and therefore in an acceptable range.

Generally, we are more highly operationally geared than ever and this means even more flexibility than before. Cost reductions are being executed very rapidly within a short period of time and we will see effects of this already in the current quarter. Is there a scope to drive out more costs? Certainly, and we have identified areas for further savings if we saw a continued slowdown. Perhaps a word from me on R&D, again as Paul mentioned earlier, R&D is not a luxury spend for us but a strategic necessity. It does not mean that we do not review the commercial potential of each and every research track, we do and Paul and I are determined to generate maximum value from each euro spent.

Let me now turn to slide five, statement of financial position. Paul also mentioned the strengths of our financial position. Bearing in mind the known industry tendency for earnings volatility, we’ve spent the last two years making sure that we are now in no way vulnerable to short-term fluctuations. This strength is what allows us to be so confident of future operational success and to continue to invest in that success. Once again, we have no bank borrowings as of the quarter end, with the equity ratio including to 76% due mainly to higher retained earnings during the earlier part of the year.

You can also see here the value created but not realized during the period in our significantly increased inventories number, up from €167 million this time last year to €256 million now. This reflects the strong production outlook and lower shipment volumes that we have already discussed at length. We expect the significant percentage of deliveries in the last quarter of the year to be made from the inventory positions.

Cash and cash equivalents including cash deposits with a maturity of more than three months, decreased by €66.1 million or 17% to €318.6 million, which equals €197 million cash and €127.9 cash deposits as of December 30, 2011, compared to €385 million in total as of December 31, 2010. This decrease was mainly due to lower advance payments from customers at currently low order levels, high work in process and the dividend payment of €60.7 million in Q2 2011. Those effects were not fully offset by the cash inflow of the period.

Finally, let’s have a look at the cash flows in the period on slide six. During the quarter, we saw a cash outflow from operating activities of €19.8 million, mainly as a result of tax payments and lower customer deposits, the latter underlining the business slowdown. Year-to-date the operating cash flow amounted to €12.4 million. Main cash outflows again were for taxes and net working capital which increases also because of lower customer deposit.

Cash and cash deposits fell €23 million in quarter and €66 million year-to-date as said. Please consider that, again, that we’ve paid a dividend to our shareholders of €61 million this year. Despite the temporary setback our financial position remains very robust. We expect our cash position to be stable looking forward with lower cash flows due to the reduction in volume.

Slide seven shows you our usual update on the progression of the business across the last eight quarters. You can see quite clearly how difficult things have become and how rapid the deceleration has been from this chart. While deliveries have slowed down dramatically, there has also been a very significant drop in order intake. At €52 million this stands at some 77% below the previous quarter. This drop is certainly a less than positive signal for the likely shape of the first half of next year but it is still too early to know whether the last quarter of the year will see a trend develop. We could assume, should the much discussed global slide into recession continue that this might be the case. However, with new products coming up on stream that deliver substantial cost savings to customers and the rise in energy cost and environmental targets both tending to accelerate lighting demand. We remain hopeful that we are seeing only a short-term softening in demand for our products.

As already talked about backlog, our decision was entirely in line with our prudent history, but €245 million we are left with is we believe secure and with our breakeven point at around €250 million, at least allows us to be reasonable certain that we will continue to generate a positive net result whatever the market throws at us in 2012. I’d like emphasize that the correction of our backlog in September included only orders where our criteria which are financing, delivery date and export license were met. This underlines how hard some of our customers were affected by the development in the LED markets recently.

With this I would like to hand you back to Paul for our guidance model and his final observations. Thank you for your attention.

Paul Hyland – President and Chief Executive Officer

Thank you, Wolfgang. So, on slide eight you can see our revised guidance model for the year. We’ve already delivered €471 million of revenues in the first nine months of this year, that’s the figure on – in the light blue area on the right of this pie chart. Assuming that we sell spares and service worth around another €11 million in the final quarter, then in order to achieve our revenue guidance of €600 million to €650 million, we would consume between €118 million to €168 million of our outstanding order backlog of €245 million.

Our revised EBIT guidance for this year is about, at circa 25% to 30% of sales. As I said at the beginning, this is certainly not what we would have hoped for the beginning of the year or even at the half-year stage. But I think that this target is a robust reflection of the new reality we are dealing with today.

Let’s now move to our last slide, slide nine, where you can see a summary of the key elements of this new reality. Reality is that the markets we serve will most likely be operating in a climate of global financial uncertainty for the foreseeable future and we will take the appropriate operational measures to address the consequent challenges we and our customers will face. Being at the very beginning of the food chain, we’ve already seen the effects of customers adjusting their investment plans in the phase of substantial market and financial pressures. We are arguably at the lowest point in this correction cycle but only time will tell if that assumption is correct.

The predictably lower level of demand for LED backlit consumer electronics, coupled with only formative demand for LED lighting products, has contributed to the strong decline in LED pricing over the last six months. This together with the global effects we’ve described as particularly effecting in our Asian markets, has moved many existing or perspective LED manufacturers to pause or even rethink of investment plan for this market. In the short-term we are realistic enough to realize we should no longer expect significant new demand for capacity orders coming from the new markets in Asia to potentially bridge the gap between the backlighting and the general lighting investment cycles.

Having said that, we have adjusted our order backlog accordingly, we are exercising our operational flexibility and have initiated the appropriate reduction in our variable cost base to reflect these sudden changes. We continue to have a strong and solid financial base to be able to invest into the development of more productive and therefore lower manufacturing cost enabling tools for our customers. This is undoubtedly a difficult time for any global industry, not least an emerging technology industry such as ours. But Aixtron has more than 30 years of experience in managing complex technology developments and volatile investment circles and so I remain confident, we will come out of this challenging time stronger than we came into in.

With that, I’d like to thank you all for your attention and I’ll hand you back over to Guido before we open up the call for questions. Guido?

Guido Pickert – Director, Investor Relations

Thank you, Paul. And let me please make my usual remarks before we hand the call over to the operator for the following Q&A session. Since we’re about to have a long list of people wanting to ask questions, could you please limit your questions to maximum of two each time. This will hopefully allow everyone to ask their questions. You are, of course, welcome to join the queue again if you wish. The cooperation on this is as always much appreciated.

I’ll now pass you back to the operator. Operator?

Question-and-Answer Session

Operator

Thank you, gentlemen. Let me now open the conference call for the Q&A session. (Operator Instructions) And the first question comes from David Mulholland from UBS. May we have your question now?

David Mulholland – UBS

Hi. Thanks for taking my question. And just two quick questions if I may, in terms of the backlog adjustment, could you possibly just comment on whether you’ve actually seen obsolete cancellations from customers in this? And if it’s not cancellations, can you say whether you’ve actually been given a new delivery bid into 2012 for these tools? And secondly, just, could you talk about the work you’re doing on costs and could you possibly give us some gauge on the OpEx levels you would expect looking into Q4 and this year and also in the 2012 next year? Thanks.

Paul Hyland

First of all to answer your question now, the adjustments that we made to the order backlog, reflected our assessment of the degree of risk that we perceived to be developing in our order backlog. So, we took out €100 million, it represented different discussions we’ve had with different customers and some of whom we do believe will end up eventually at cancellations. That isn’t so much a question of that €100 million consisting of customers who have revised their delivery timetables; there are customers who have revised their delivery. This €100 million to us represented a potential risk in terms of being able to guarantee deliveries in 2011. It is not impossible that those orders may return to the backlog but at this point we consider the risk is too high to be able to record it as firm order backlog.

Wolfgang Breme

And Dave, if it comes to cost reductions, we have to distinguish between two areas; number one is the cost of sales area. There we already have reduced our output capacity significantly during this quarter, the fourth quarter. So the target here is to secure a sustainable gross margin looking forward. And the second area of course is about the operating expenses. Here I expect a run rate of €25 million for the next quarter, excluding any currency effects, which are in this area hedging valuations, et cetera, and so forth not really cash relevant. So, and if it comes then to the question of the breakeven model, my calculation is as always relatively simple. We assume if we have a 40% gross margin, we assume that we can have, let’s say, a breakeven in the area of €214 – €250 million in that range, taking into account costs of say €100 million in the operating expense area.

David Mulholland – UBS

That’s good. Can I just ask one quick follow up? You mentioned that the production you expect to ship mostly are to inventory in Q4 and with that quite – but you are not really going to be manufacturing anything and its real tool lies in Q4?

Paul Hyland

Of course, we will, I mean, see the products which are in our work in progress are not 100% ready. To us course we have – we saw also in cost of sales service activities et cetera, but of course if the background of you question is overhead recovery in this areas we have to work hard to keep our cost in line but those measures were already initiated. And as I said before the breakeven was always in the last say 1.5, 2 years in that range. So we had relatively easy program in front of us when we started to reduce production output. But the output of course in the last, we are right, in the next two quarters – this is how far we can see, will be relatively low in that area in terms of number of systems build.

David Mulholland – UBS

That’s great. Thanks very much.

Operator

The next question comes from Günther Hollfelder from UniCredit. Please, your line is open now.

Günther Hollfelder – UniCredit

Hi, thank you. If I assume that the rebound in orders potentially in the second half of 2012 could be driven then by the established players in Korea and Taiwan with potentially higher capacitor utilization rates at that time. I was wondering I mean you recently introduced an upgrade for your Thomas Swan system, but is it – would it be correct to assume that by that time you will also have an upgrade concerning your planetary reactors for the G5 to be ready for this new investment ways?

Paul Hyland

Günther, it’s Paul here. In both products, what I would call products enhancements and indeed new products development going on in parallel. And I think you can expect you would see further product enhancements and products coming from us certainly over this next 12 month period. If I can also pick up your first point, I think the assumption certainly the second half of 2012 is extremely difficult to predict, even the first half of 2012, I think, is a challenge. And once you might imagine if it’s lighting that has drive any sort of increase in order intake, it could quite easily come as you suggest from areas like Korea or Taiwan that are investing heavily at the moment and have government programs to encourage those investments, but equally so, we know that China is very focused on this area, and although there has been very, we recorded an unscheduled slowdown in that area. And we also pick up signals that there is a possibility that we might start to see subsidies LED products in China. To me, I think, that’s a very important next stage because the missing element at the moment and part of the reason we have this affect in China is, at the moment there is an insufficient internal market to draw this huge investment in capacity.

So, I wouldn’t like to say for certain where it comes from. The opportunities like certainly predominantly in Asia and I think it could come from any other industry but to predict what happens in the second half, I am afraid is a little bit of challenge for us at this stage. We’ve never been out to see two quarters ahead and I would say that right now we’ve probably challenges even on two quarters.

Günther Hollfelder – UniCredit

And the second question would be, I mean, I know, I mean, it makes, doesn’t make a lot of sense to calculate your market share on a quarterly basis. And for example, in the third quarter your market share is, yeah, came down in terms of orders number and also in terms of sales significantly below 50%. But given the conformation of your guidance for the full year, I mean, is it correct to assume that you had – that you had a small number of customers with like say, big order push-outs and so on, effecting you in the third quarter that we will see a sort of stabilization if not a small rebound in your market share going into Q4, and that Q3 is a non-recurring event here for special factor here affecting Q3?

Paul Hyland

Well, certainly, it’s true. We had some substantial customers dropped out of our delivery schedule in Q3. And I think that you can see that reflected in our high work in progress inventory, it drove out of that. But you’re also right to say, it’s not really sensible to judge either our or any of our competitors’ result son a single quarter. It’s a marathon, not a sprint and you will of course get fluctuations as you’d expect. But it was, I think for us, a pretty severe effect because of the suddenness of substantial deliveries as rescheduled in the quarter. I think I’ve said on the call that we might be able to argue, this is the low point, but such is the limited visibility. I think we can only say that only time will tell whether or not this is a two quarter, three quarter or even four quarter slowdown. We have to wait and see. And that’s the reason that we are paying so much attention to making sure we get that cost base down to sufficiently – sufficient levels to be able to continue to support the R&D investments we want for next generation products.

Günther Hollfelder – UniCredit

Thank you.

Paul Hyland

Okay.

Operator

The next question comes from Janardan Menon from Liberum Capital. Please, your line is open now.

Janardan Menon – Liberum Capital

Yeah. Thanks for taking the question. I was just wondering in your China market, in the last three months, what – to what extent do you think you’ve seen your customer base sort of disappear altogether, which is that the customer has decided not to participate in the LED market at all or the customers have gone out of business or something like that. What I am trying to get at is if the market does rebound in the next couple of quarters, then to what extent are we looking at a smaller size of addressable market in China versus what was seemed to be the case a few months ago? And the second question is given your competitors is – have seen some degree of success with the multi-reactor system. I was wondering what your latest thoughts are on to how ready market is both from a technology and operational standpoint for multi-reactor system?

Paul Hyland

Okay. On the Chinese customer one, it’s probably sensible, I think, also to reflect over the last, should we say, nine to twelve months, we have seen a significant change in the profile of customers in China. We’ve seen a number of substantial corporate customers come in, who have constantly raised the average number of systems they are ordering and had the ability to make longer-term investment plans. The downside of that of course is, if they do suddenly slowdown will stop, it has a much bigger effect and that’s what we saw. There are, certainly, maybe one or two of the big customers there, who if you took it on face value you might assume they are out of the business, but I think those things in China, the devil’s in the detail. It’s certainly true, I think, some of those new players could experience difficulty in getting hold of the necessary experience and expertise to be able to run some of these complex systems and they perhaps also underestimated in some cases the degree of complexity involved in putting infrastructure in place.

And I think certainly one or two of them imply that the sudden decline in pricing that – and we’ve seen probably close to 30% this year, it’s probably 10% to 15% price decline a quarter, currently. I think that coupled with increasing difficulty to get funding, certainly, should we say dampen their appetite for what was fairly substantial investing plan. I don’t necessarily think all of these people have gone for good, but certainly we did see people who perhaps became less confident of making the short-term investments. When the market comes back, I think we will continue to see a mixture of some of those mid size established companies and a continuation of a new investments paid by the bigger corporate customers. The Chinese Government’s ambition of course is to eventually end up with 5 to 6 major global players out of this program of investment encouragement. So, I would expect still to have more than enough customers to address in China.

Probably you should ask our competitor as to where they stand on the multi platform system. Certainly, we have a strong view in terms of not just the viability of multi platforms but also the timing of it. And it’s important to note that we’re at the stage now in many of the markets where the focus is on subsidizing the creation of high volume through puts, eventually, of course, we’re going to see those markets, particularly, the new markets begin to concentrate on more complex structure and more complex technologies. There is a time and place for everything and then we could debate as to when that is. We have expensive multi-generation developments going on at the moment; if and when it was appropriate to come out with such a product we do so, but we obviously don’t talk about new products before we bring them out.

Janardan Menon – Liberum Capital

Okay. Thank you very much.

Paul Hyland

You’re welcome.

Operator

The next question comes from Adrian Pehl from Equinet. Please, may we have your question now?

Adrian Pehl – Equinet

Yes. Hi, gentlemen, good afternoon. Actually I’ve got three, four quick ones. First of all, I was wondering whether you did lower your average selling prices going forward. And next one is on whether you see any threat of any kind of write-downs may be to inventory or whatever? And also I saw that services and spares was a bit weaker in the third quarter and obviously also as regards to your guidance. So I was wondering whether I got something wrong here because I thought it was rather function of the installed capacity and so we not expect this part of the business to grow or are customers also saving here. And the last one is on the silicon business, just wondering whether you could give us a kind of update how was the progress here and what should we expect, maybe not for a very long-term, but in fact for the first half of 2012? Thank you.

Paul Hyland

Okay. Average selling prices and it is a much more competitive market and I think we’ve said on previous calls, we would compete where necessary, certainly, but it’s a fact that there is much more pressure on pricing as been before, both from a customers point of view and the available subsidies and also in the competitive situation. But we continue to compete on technology and price, but technology is our initial principal. Write-downs, unless Wolfgang corrects me here, there is no current write-downs. Where, for example, we have systems which we built for A customers such is the modularity of our products, we don’t see that to be any risk at all.

And spares, actually we saw something quite similar, back in 2009 or rather at the end of 2008. What we saw when the market declined rapidly was as customers became under pressure, financially under pressure, rather than all the spares, we saw them begin to cannibalize systems that weren’t been used elsewhere in the plants. And there was definitely a period, I think, probably a two quarters, if we go back, you can probably find the numbers, where we did see a very significant drop in spares’ demand, where customers either consumed the absolute volume of spares they had available and or delayed service activities until the market picked up. I don’t think it’s out of the ordinary.

And silicon, well, we are continuing to make very good progress there. We have got even more response for some of the, particularly, the high throughput QXP product we have. And we are not yet predicating large revenues in the short-term, but technically, on a number of fronts, I think we’re very pleased with the pace of the development that we’ve had there. We aimed there to sort of sub 32 nanometer memory, sub 22 nanometer logic. And I’d say on both fronts we were very happy with the technical progress, but of course, the challenges now that have come in, convert into commercial success and when the time comes we’ll obviously talk about that some more.

Adrian Pehl – Equinet

All right. Thank you.

Paul Hyland

You’re welcome.

Operator

The next question comes from Maxime Mallet from Natixis. Please, may we have your question now?

Maxime Mallet – Natixis

Yes. Good afternoon. Thanks for taking my question. I got two questions actually. First one would be regarding your average delivery time, what do you see going forward for your average delivery time? And the second question would be regarding the potential new comers in the MOCVD equipment market. Are you seeing some newcomers?

Paul Hyland

Average delivery time, I mean we – I could (indiscernible), which is sort of four to six months; we can do it quicker if we know you. If it’s a configuration that’s fairly standard we can do it, we can respond. If the question is, if it there’s a sudden pickup, can we respond very quickly. The answer is yes. And the same applies to if we needed to ramp up production. We’ve taken out a fairly significant amount of contract staff, which we use to drive our manufacturing but we can equally switch it on fairly quickly. MOCVD, well – the old familiar competitors remain there and continue to compete in every market. There are of course a number of new names and indeed I wouldn’t be at all surprised if in due course we don’t start to see some companies evolving out of regions like China, where there will, I am sure, be subsidies to support the development of MOCVD in the future. But at this stage we haven’t seen anything yet which represents any real traction in terms of new competitors.

Maxime Mallet – Natixis

Perfect. Thanks a lot.

Paul Hyland

Okay.

Operator

The next question comes from Olga Levinzon from Barclays Capital. Please, it’s your turn now.

Olga Levinzon – Barclays Capital

Hi. Thank you for taking my question. I was wondering if you can talk about the composition of your backlog as it stands right now and specifically how it breaks down between China, Taiwan and Korea?

Paul Hyland

Yes, I think I can. I am just thinking – well I am trying to just think through that number. Still the vast majority, if we look at the vast majority of our order intake continues to come from Asia. I think for Q3 we were close to 80% coming from Asia, which is down from the previous quarter because most of the slowdown had occurred in Asia. I think we finished last quarter about two-thirds of our backlog being for China. And today we are probably, let me have a look, we’re probably still around about 70% of our order backlog for China. And that then qualify Taiwan, Korea, Japan, but still in the region of about 70%, let’s say.

Olga Levinzon – Barclays Capital

Got it. And then specific to your OpEx structure, you talked about around €25 million into the fourth quarter, and the €250 million breakeven point going forward. What would cause you to rethink that breakeven point of the appropriate level and potentially get it down lower?

Wolfgang Breme

Hi, Olga. The simple question is, if things worst comes to worst, but we don’t see that at the moment. I mean, the cash breakeven on those levels is 200 million and we haven’t seen those low numbers since 2008. But definitely it’s depending on what the market is doing currently. And honestly, I don’t see that, but we’re prepared to adjust the company further down if necessary. But, again, I think €200 million cash breakeven is still very low. I mean, that’s like 25% of last year, so I think we have to be realistic. It seems very low to us.

Paul Hyland

I think our motivation also, if you get this cost down in the short-term is that we have a very extensive R&D program and of course that is our future. So, we currently – we will finish our new R&D facility by towards the end of this year or by the end of this year, and which is – in which we spent about €60 million by the time we finished it. And I think our R&D head count rose by about 13% from the last quarter. So, a lot of activity is going on in there. We’re very motivated to ensure that we can protect that for the long-term future. We’ve a number of interesting things going on there.

Olga Levinzon – Barclays Capital

Just a quick follow-up from the previous question, any implications in your gross margin next quarter from fab that you’re shipping out of inventories?

Wolfgang Breme

No, we don’t see that at this point.

Olga Levinzon – Barclays Capital

Okay, thank you.

Operator

The next question comes from Andrew Huang from Sterne, Agee. Please may we have your question now?

Andrew Huang – Sterne, Agee

Thank you. So, I think you mentioned earlier in your prepared remarks that you thought that 80% of the backlighting opportunity has already been captured. So can you share with us, the number of tools you think are needed to meet the remaining 20% of that opportunity?

Paul Hyland

Andrew, one of the reasons that I said that – this is a figure I’ve used, I think before. And although we’re hearing now of substantially lower than predicated number of TVs being shipped, I think what’s important to remember is, if we were to go back six or nine months, the industry was running at a rate in which it was being predicated that LED TVs would be in this year 55% to 60%, 80% next year and certainly 100% probably by half way through the next year. Now, the assumption I follow, I think it’s still valid, is that typically the equipment was installed close to 12 months before you’re going to see what I call retail penetration. So, in that sense, it doesn’t matter the estimate now for LED TVs may only be 40% this year because the installed base was already based around trying to achieve 80% year after.

And so, that’s my assumption. I think it would be unrealistic to think that we’re going to – we’ve still got 60% LED backlighting to come. I think we want to be realistic about this. I don’t know how many more, the other 20% or indeed what the timing would be. But, again to be realistic, if you look at the devices that many of the key LED TV producers are now bringing out, they are progressively using less and less LEDs albeit bigger die size, but nevertheless, the efficiencies are beginning to kick-in. But we should not assume and we will not assume that there is any major residual backlighting market to come. There maybe some, there may well be some if for example, the LED cost continues to drop quickly such that real backlighting rather than edge-lighting becomes viable. But, I think it would be wrong to simply assume that there will be.

Now, of course, if I come back to my bridge argument; in the past, the value between backlighting and lighting to some degree has been covered by fairly expensive subsidy investments coming from China which are almost, I won’t say exclusively, but predominantly aimed at the creation of the infrastructure to support their own ambitions for lighting. But, I think it would be foolish to bank on your business plan, that there’s going to be a substantial amount of business still to come from backlighting. I don’t think that’s realistic.

Andrew Huang – Sterne, Agee

Okay. And then my follow-up is when you adjusted your backlog down, can you comment on which geography adjusted downwards the most?

Paul Hyland

Well, I’d like to just say Asia, but I think it would be – no, I should say obviously there was a substantial portion on it coming out of China and coming from a number of relatively new players in the market who have slowed down their investment plans. They weren’t alone, but they were predominantly coming out of Asia.

Andrew Huang – Sterne, Agee

Thank you very much.

Paul Hyland

You are welcome.

Operator

The next question comes from Alla Gorelova from Steubing. Please, it’s your turn now.

Alla Gorelova – Steubing

Thank you. Good afternoon. Can you imagine any other technology which could use your machines as a sort of – in a way to compensate a slowdown in demand from LED manufacturing to ease up there pain?

Paul Hyland

Yes. There are a number of other applications which are using the MOCVD technology and look quite promising. Applications such as Power Electronics particularly is very interesting development in the market. But, in terms of the timing and the scale unlikely to necessarily give us a huge shot in the arm between now and when lighting really kicks in. But there are – there is a whole range of – like MOCVD related technologies which have a lot of promise, but it’s all in the volume and the timing.

Alla Gorelova – Steubing

Okay. So, it’s difficult to say how much longer would it take those technologies to develop?

Paul Hyland

Well, they’re being developed now. But, I mean, I’m always reminded that we – the whole market was getting very excited about what might happen for lighting back in 2001.

Alla Gorelova – Steubing

Right.

Paul Hyland

So, how often the actual momentum takes a little time to build up, and then it snaps in very quickly. We saw that with backlighting. I mean, it’s still not impossible that we saw a sharp snap back as we saw with backlighting, but it does require some perhaps very focused strategic investments by relatively small number of people to make that happen. But, I think we can’t tell you we’ve seen that in the moment. I think we have to be patient.

Alla Gorelova – Steubing

Okay. But with regards to LED lighting – much as I understood your statements, your best case sort of scenario is that demand will pick-up from the mid 2012. What’s your worst case actually? What – I mean, what happens if the LED lighting was another two, three years?

Paul Hyland

Well, I certainly haven’t said that it picks up in May 2012. So, I am not sure where you’ve heard that.

Alla Gorelova – Steubing

You sort of indicated that a couple quarters, so I presume that would be the case?

Paul Hyland

No, no. I hope, I didn’t leave that opinion. I really, don’t know. In the past we’ve been able to see maybe two quarters ahead in term of being able to predict business. We certainly can’t see beyond that and I’d say at this moment even it’s difficult to see within two quarters; that’s just the nature of the market. However, on the other side, I am almost certain that it’s not going to be two years before you see it kicking in. There is absolutely – in my personal opinion, there is no way this is going to sit and hibernate two years before it really kicks off. I mean we are currently at the point where we have around about 3% of all lighting being served by the LED industry. And there are too many significant players in the market who are investing significantly both in capacity and in technology for it to wait for two years before it comes. I don’t know the timing though. I think we do need a catalyst to come from an area or group or particular companies.

Alla Gorelova – Steubing

Okay. But, in any case under two years?

Paul Hyland

Yes.

Alla Gorelova – Steubing

All right, thank you.

Operator

The next question comes from Francois Meunier from Morgan Stanley. Please may we have your question now?

Francois Meunier – Morgan Stanley

Yeah, Paul, can you hear me?

Paul Hyland

I can indeed, yes.

Francois Meunier – Morgan Stanley

Yes, sorry. Yes, actually I would like to come back to exactly to the previous question. I understand this is your job to be optimistic about the underlying business. I’m really keen on general lighting. But my impression is that visiting all the factories in Asia and also in Korea that actually capacity utilization is pretty lower there and around may be 30%, 40% at best and those factories could become relative to do general lighting, and general lighting could start maybe without a big production on actually bank equipment. And as you’ve said if we see a concentration in China, then that could delay the one part of equipment. So, I don’t know, I’m sure you’re visiting all those factories even more than I do. What have you have seen recently and what you think those guys are going to do in the next 18 months?

Paul Hyland

Well, first of all, and actually ironically, some of the pressures that our customers are seeing at the moment where they’re seeing 10% to 15% a quarter price decline. I think, we’ve seen over 30%, certainly this year. Actually, it doesn’t do us any harm in terms of bringing forward the potential for LED lighting. The cheaper the LEDs, the more likely we are to achieve that key tipping point. I hope, it could lead, actually although some government subsidies support private consumers to buy LED. The best example is Japan, Japan where I think it’s predicted now, they could have a penetration rate as high as 50% in the second half of the year, driven by not only subsidies, but also a considerable sort of national focus on energy reduction.

But I personally believe the most likely – the high volume, but low fruit is probably commercial lighting where there is much longer use of lighting, anything from 12 to 24 hours. In that case because of the energy savings that can be made, the return on investment equation is much better. And I’ve said, my opinion is that maybe around about $15 to $20, could represent a tipping point where you get return on investments certainly in less than 12 months.

We have some countries, Korea, I think is already selling 60-watt devices at about $17, I think it is. And there is an increased number of customers – of customers who are now registering under the Energy Star program. So, you’re getting both quality products and we’re seeing low cost products. And of course, the trigger for this industry, the catalyst will be people can buy products. They’re readily available on the right price. It may take a bit more time and a bit more patience, but the fact we’ve already got several regions selling devices close to what is – I’ve made the personal assumption of $20 to $15 encourages me to think that we’re not so far away. Now whether that’s six months, 12 months, I don’t know, but I would still remain confident that all the elements are in place for lighting to gather traction as an end market driver.

Francois Meunier – Morgan Stanley

Thank you, Paul. Maybe if I may ask a question about the customer consolidation and the impact on the P&L, if there is any and also on the cash. What happens if maybe I’ve paid you €0.5 million for tool, would you keep it to €0.5 million or what’s going on?

Wolfgang Breme

We will certainly enter into the discussion with – if you paid it with us and then we’ll see what your plans are at the end of the day. Of course, I mean we are in a tough business and of course we are looking for profit for this company not for others, but we make decisions on a case by base basis in discussion with our customers.

Francois Meunier – Morgan Stanley

So, was there any kind of one-off impact in Q3?

Wolfgang Breme

Not at all. No.

Paul Hyland

No.

Wolfgang Breme

No. Not that you would see there. No, no there were not in either direction, nothing.

Francois Meunier – Morgan Stanley

Okay. Thank you very much.

Paul Hyland

You are welcome.

Operator

The next question comes from David O’Connor from RBS. May we have your question please?

David O’Connor – RBS

Yes. Good afternoon and thanks for taking my question. One for Paul, and then a follow-up for or a clarification for Wolfgang, firstly, Paul and then, you talked previously about an ingestion phase for the tool, the MOCVD tool markets. I mean, do we need to see more consolidation happening there before we see the industry recovering. I mean, kind of related to that where exactly do you think we’ll see a recovery first within lighting? Is it going to be more on the street lighting, commercial or you think on the residential side? And maybe touch on utilization rates following on from Francois’ question as well. I mean, where do you kind of see utilization rate needs to get before that kind of works into the, a recovery into orders?

Paul Hyland

Well, I think in terms of where it might recover. I mean, street lighting is a possibility because that’s predominantly tends to be government funded or city funded. And there are certainly in some areas both in Korea and in China, but I think also elsewhere, you do see quite a lot of – I’d call it top down subsidies. It’s the big capital project funding to encourage local industry. That’s not impossible. But on a pure commercial level, I certainly believe commercial lighting will become more meaningful more sustainable than residential. Today the average consumer who has the choice of buying a $15 to $20 light bulb at a good price in comparison to an incandescent, and only has it on for two or three hours a day is probably going to think twice. So, I think the math makes sense if you think about using the adoption in the commercial environment. So, I think it’s more likely to occur there. I’m sorry, can you just – the front half of your question – I haven’t really...

David O’Connor – RBS

On the consolidation?

Paul Hyland

Yes. Sorry, I beg your pardon. Yeah, no. I think there will be consolidation. One of the reasons that we’ve seen this very aggressive growth, part of it has been driven by not end market need but by the availability of subsidies. And that’s why I call it artificial demand. And I don’t knock it because, of course if those sort of subsidies can create the momentum, this is what the solar industry is always looking for, one hopes that sort of subsidized demand turns into end market demand. But unfortunately, the current financial pressures and dropping prices is -- certainly some regions where there isn’t yet a well enough developed end market to consume this huge volume of new product beginning to hit the market. And so, I think it’s a timing issue. But, I think there will inevitably be some consolidation, particularly if it’s been initiated by availability of government funding.

David O’Connor – RBS

Okay. And just on the utilizations, last part of that question. Do you have any view on where you need to see utilization before we see a bounce back in orders?

Paul Hyland

Well, what we’ve seen and as we said in more developed markets, places like Taiwan, that’s typically range around 80% marking start to see dialogue kicking off. There has been an increase actually even in the last month in utilization in Taiwan. We’ve seen it in the last six months as low as 40% and 50%, and that’s what driven down some of the prices. But we’ve heard from customer who are now beginning to get some orders including backlighting orders, at that time of year to run into Thanksgiving, Christmas and Chinese New Year and that seems to effect the capacity up a little bit. But in other areas, like China where as I say there wasn’t any demand to draw on the utilization and people who are making investment purchases rather than pure market capacity buys. So, I think it depends on which region you’re talking about.

David O’Connor – RBS

Okay, thanks. And just a follow up then or clarification on, Wolfgang, the 100 million OpEx you mentioned previously. Is that an OpEx going for 2012 or is that what you’ve worked into your breakeven of €250 million?

Wolfgang Breme

This of course the breakeven of €250 million.

David O’Connor – RBS

Okay. It’s not any OpEx going through next year.

Wolfgang Breme

No, no. Just – there is of course a direct or variable element in all of the OpEx cost and if I take everything out which moves with revenue or EBITDA profit, then we come, I come to a figure below for a non-cash breakeven, for a figure of, let’s say, €90 million to €100 million OpEx, if I take everything out.

Paul Hyland

Just not really typically, we don’t tend to give year, forthcoming year forecast until we report on the year. So, typically around about March we’d do that. We gather our thoughts. We don’t give next quarter forecast other than if you subtract from our guidance. We will be working on that in the next few weeks.

David O’Connor – RBS

Okay, great. Thanks guys.

Paul Hyland

You’re welcome.

Operator

The next question comes from Jed Dorsheimer from Canaccord. May we have your question?

Jed Dorsheimer – Canaccord

Hi, thanks for taking my question here. I guess the first question, Paul, just sort of touching on some of the consolidation comments. I think a lot of people probably haven’t gone through multiple cycles like you have. So, it’s probably an important one. If we look at China, specifically and I wholeheartedly agree with your commentary that the Chinese government really wants five or six, half a dozen sort of companies. If there is a 100 right now and so if we just say that, all right, 94 basically are going to, you know, will go away, it leaves you with probably 350 to 400 tools in the Chinese market. I’m curious what your thoughts are with where those tools are going to go. And if we sort of use Taiwan as a proxy between, you know in that first cycle as we saw, I want a similar type of effects, multiple companies and really Epistar consolidated that particular market. That sort of a absorbs a lot of the additional tool purchases. Do you see the same type of dynamics from the Chinese markets or do you think that Chinese is just going to write these off and companies will continue buying new deals?

Paul Hyland

No, I mean, I think, first of all, it’s not necessary the case that 94% will disappear. I think we probably should be realistic; there is always a layer, a niche layer that operates. But I think, it is inevitable that you will get consolidation with the bigger players where we’re acquiring those. And I could imagine, I think I’ve said this before, that such is being the rush to make these investments, I could see the – early 2012, you might start to get a few of the, perhaps suffering, perhaps when you got two-thirds of those subsidies, because they haven’t produced sufficient qualification of their devices or haven’t seen the revenue to support getting the last portion.

So, I think it’s a natural market dynamic; it’s just exaggerated in China because of the speed and the intensity of the investment. I think your comments about Taiwan is very valid because as you say, we have seen some of that sort of growth dynamics occur there. And what we saw there of course was not necessary failing companies being emptied and machines being moved. Its more question because of what machines have been used for and what the process has been run through. And the likelihood is more that the expertise of the acquiring company will be applying to the new companies. So, I don’t think you necessarily expect to see redundant machines. I think what you’ll see is acquiring companies perhaps and are helped to maybe encourage by government or cities to leverage increased critical mass and therefore be able to produce greater volume at lower price.

And I certainly don’t think we’re going to see super hubs with 100s of MOCVDs in the same place. And I think it will be a progressive absorption of those relatively early failures. And will that be a great market, well, we haven’t seen one to-date, is not impossible of course. But there is always the risk with growing market that you’re buying and acquiring a machine that has in actions being contaminated by whatever materials have been run through it already. I think, it’s more likely acquiring companies who will look to develop and refine the process of the company that they’re acquiring.

But there is certainly – I think the biggest asset here, the focus in China so far has been on volume and throughput. The next big challenge in this accelerated development process to them will be how quickly, they can develop the expertise and sophistication needed for the process development. So, the biggest asset of acquiring, may will be expertise rather than necessarily just balance sheet strength.

Jed Dorsheimer – Canaccord

I think that’s a fair point. I mean, the – what I was hinting at is more of the consolidation in terms of how you see that affect the business model versus the growing market developing, is there would be precedence for more consolidation versus growing market, but I think?

Paul Hyland

I think if we look at the maths that we’ve been given, Jed, in terms of a need or anything like a 10 times reduction over the next sort of five to 10 years in terms of cost. I think we’ll quite easily – I could imagine that we will rapidly see a number of generation of products, MOCVD products, which gave customers greater flexibility, greater process capability and to be able to drive the cost down. So, what happens to the old machines that aren’t performing to the new required standard remains to be seen. But, I always model, how they’re able to create applications from a low cost LED. I can’t answer that question. The future lighting new products are far more productive and are more capable of delivering higher spec devices. I think that’s the way forward likely for the next four to five years.

Jed Dorsheimer – Canaccord

Sure. And then just as a follow-up, maybe just moving to the near-term here, I just want to, help me if I’m looking at this incorrectly, just sort of back into the numbers exclude the service. Looks like somewhere in the 40s in terms of the number of tools, we shipped in the Q3 timeframe, bookings looks like it dropped about 77%. To achieve the mid point of the guidance, it would basically – it assumes almost the doubling of tools and where month end, so obviously you have a good visibility, I’m just wondering, am I looking at that correctly?

Paul Hyland

Yeah, we’re not – we’re certainly not depending on new orders. If you look at our order backlog what we have about €245 million, and we’re saying off that €245 million, we’re looking at somewhere between a €120 million and €160 million in revenue. So – and of course, as you quite rightly say, at this stage, if we haven’t got the orders, we wouldn’t be shipping them.

Jed Dorsheimer – Canaccord

No, I guess, not the order fall, but the shipments essentially doubled quarter-to-quarter, so are these sort of end of year type of true-ups or...?

Paul Hyland

No, not really. I think you have to look at – you have to be able to look or imagine what the reason was behind the Q3 correction. It was there in Q3, you only need one or two substantial players to step out of previously committed delivery requirements to make a big gap. And that’s essentially what it is. You take big mass out of the bucket of water, it has a short-term effect. Now what the run rate is, I can’t tell you. I really can’t tell you that, I’m afraid. But no – don’t – you should look more at what happened in Q3 and try to draw obvious conclusions from Q4’s forecast.

Jed Dorsheimer – Canaccord

That’s fair. That’s it for me.

Paul Hyland

Okay, good luck.

Jed Dorsheimer – Canaccord

Thank you.

Paul Hyland

Thank you.

Operator

The next question comes from Daniel Amir from Lazard Capital Management. Please may we have your question now?

Daniel Amir – Lazard Capital Management

Thanks a lot. All of my questions have been answered, but I have a couple of questions here. Can you a bit expand on kind of how you look at in terms of your tool R&D roadmap considering when the G5 came out last year, where do you stand kind of potentially for 2012 or 2013 in terms of next generation development?

Paul Hyland

Well, Daniel I think you wouldn’t expect us to talk in detail about new products, but we did say, I think even when we raised money back in 2009, that our view was at that time we could see going into a period where product cycles would be shorter. And so, if you reflect back on previous product cycles, I mean real products not variations on products, then I think it’s probably inevitable that you will see shorter development cycles because the industry is moving faster and needs to reduce cost and (indiscernible) faster. But in between you’re going to see, I would expect to see a steady stream of like, product enhancements that enable us to develop, offer customers greater volume and lower price and lower cost of manufacturing. But – we typically have an R&D math where we have at least two generations that are at different stages from concept through to development and is not unusual.

The only thing that’s happened really is that we’ve up to the investment in R&D and we’ll spend about €60 million on this new facility and we will nearly increase the R&D and engineering head count up 50% by the time we move everyone in, it went up for about 13% last quarter. So, I’m afraid I can’t give you a product details. I’m sure you wouldn’t expect that, but – and it’s not just an MOCVD, it’s not just for LEDs. And I think that’s one of the underlying principles of our engineering, and we’re looking for modular structures that we can use for other technology equipment – equipment technology for other market. So, we should get leverage not just in the target LED market, but also the other areas that we’re focusing on.

Daniel Amir – Lazard Capital Management

Okay. And the other question is, in the past you kind of given your projections about how many reactors you need in the industry to support part of the general lighting market the next few years. I mean, can you just kind of give us an update and kind of your opinion, kind of where we stand right now considering the changes that we’re seeing in the industry now?

Paul Hyland

Let me benchmark it against what I’ve heard from other commentators in the market. I have heard estimates that we could need 5,000 systems for all of the lighting market and depending on whose model you look at, it could be as low as 2,000. It really depends on who you’re talking to. I certainly don’t think it’s 5,000. And I think you’re probably talking may be 3,000 a bit may be. And the reason is, difficult to be very precise about it; because of course each generation of equipment is that much more productive. And I think we are going into a period where you will see some fairly substantial developments in more and more efficient products. I really don’t think that the likelihood that you’ll see vast numbers of 5,000 systems out there, because frankly there is no enough engineers to run 5,000 systems. But there probably is enough engineers to run 2,000 or 3,000 more sophisticated products. So, I don’t know the answer to that at the moment.

I do know that the lighting because of the larger material area requirements, we’ll have a disproportionate effect on the number of systems, if we were to have today systems of standards. But the sheer area necessary to support lighting will accelerate and drive even bigger wafer devices systems with higher throughput to delegate cost of ownership in the right place, so it’s somewhere in between there.

Daniel Amir – Lazard Capital Management

Okay, thanks a lot.

Paul Hyland

You’re welcome.

Operator

The next question comes from Jürgen Wagner, MainFirst Bank. May we have your question please?

Jürgen Wagner – MainFirst Bank

Yeah, good afternoon. Thank you for taking my questions. And actually on cash, looking at your balance sheet you have €300 million plus cash and you mentioned your cash breakeven sales level is €200 million. And going back to 2004, and you decided to acquire Genus, you were like in the similar situation and the next investment cycle was a bit of couple of years off brought us away and you decided to acquire technology externally. And can we expect the similar move now and if not how are your plans on cash distribution?

Wolfgang Breme

Hello, Wagner, just to maybe start with this cash distribution, I believe that our dividend policy is not going to change, this set of cost under the (indiscernible) that we have our Supervisory Board and our shareholder to decide on this. So, we will again have a, I think a good payout ratio next year. Therefore, if you take this out, we assume that most of the cash we have on our balance sheet is operational cash and not held for, let’s say significant technology investments.

Paul Hyland

I think, if I can add to that, certainly we don’t think that cash is a dirty word. And in fact maybe the current circumstances are really underlying the essential – how essential is to have a healthy cash position. This is just one of those fluctuating situations that you hope that cash protects you from. And however, it’s probably true, and I think it reflects our fairly lean model, that if you were to compare us with the semiconductor equipment company, a pure semiconductor equipment company, the amount of cash we hold is considerably less in ratio than perhaps elsewhere.

In terms of the opportunities and the acquisition of technology, as you so rightly point out, we have made acquisitions in the past including Thomas Swan, I think rest was silicon carbide business and we’ve acquired several different technologies, small bolt-on companies as well as Genus, Genus being probably the biggest acquisition that we made. The common thread is we don’t actually believe in growth by acquisition alone that’s not the principles we follow. If we could see some direct relevance so the core competencies we have of complex material deposition, then we would consider it, but that wouldn’t describe us as a naturally acquisitive company. But if we saw something that we thought was very interesting for us, we would quite definitely consider it if the circumstances and the attractiveness of it was appropriate to our internal strategy. But we do not have any current binding commitments to any such thing at the moment.

Jürgen Wagner – MainFirst Bank

Okay. And then on your free cash flow, how positive do you expect it to be in Q4 based on your much higher sales level?

Wolfgang Breme

Well, it’s – of course, it’s difficult judge because it’s also depending on other factors, but as I said in the – on the conference calls, we expect it to be significantly positive in this quarter, because like very often in the downturn phase, we will hopefully cash in more and more of our inventory and our receivables.

Jürgen Wagner – MainFirst Bank

Okay, thank you.

Wolfgang Breme

Thank you, Wagner.

Guido Pickert – Director, Investor Relations

I am afraid that unfortunately our time is up for today; therefore, I must close the call now. For those questions of you that were not covered during the call, Klaas and Andrea in the U.S. or me here in Germany will be available at a later stage and happy to discuss them with you. Thank you all. Thanks to all of you for having listened to us and talk to you next time. Thank you.

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