Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Aixtron Aktiengesellschaft (NASDAQ:AIXG)

Q1 2012 Earnings Call

April 26, 2012 9:00 am ET

Executives

Guido Pickert – Director, Investor Relations

Paul Hyland – President and Chief Executive Officer

Wolfgang Breme – Executive Vice President and Chief Financial Officer

Analysts

Simon Schafer – Goldman Sachs

Uwe Schupp – Deutsche Bank

Sandeep Deshpande – JPMorgan

Olga Levinzon – Barclays Capital

David Mulholland – UBS

Bill Arnold – B. Riley & Company

Carter Shoop – KeyBanc Capital Markets

Janardan Menon – Liberum Capital

Francois Meunier – Morgan Stanley

Timothy Arcuri – Citigroup

Aaron Chew – Maxim Group

Andrew Abrams - Avian Securities

Jed Dorsheimer – Canaccord Adams

Edwin Mok – Needham & Company

Operator

Good afternoon, ladies and gentlemen, and welcome to AIXTRON’s First Quarter 2012 Results Conference Call.

Today's call is being recorded. And I would now like to hand over to Mr. Guido Pickert, Director of Investor Relations at AIXTRON for opening remarks and introductions.

Guido Pickert

Good afternoon and good morning everyone, and thank you for attending today’s call. With us today are Paul Hyland, President and Chief Executive Officer of AIXTRON, as well as Wolfgang Breme, Executive Vice President and Chief Financial Officer of AIXTRON.

As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcast without 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 slides, page two of which contains the usual Safe Harbor statements. I will therefore not read it out loud, but would like to point out to you that it applies throughout the whole conference call.

You may also wish to have a look at our latest IR Presentation, which includes, as you probably know, 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 a transcript on our website at some point after the call.

Let me now hand you over to Paul Hyland, AIXTRON’s President and CEO, to start the actual presentation. Paul?

Paul Hyland

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 Q1, 2012 results.

I’m sure that many of you are familiar with our format by now. I’m going to start the presentation by giving you an overview of the key developments in the markets and will pick out some specific points from our Q1 financials and operational performance.

Wolfgang will then give you a more detailed view of our financial and business performance during the first quarter and will expand on particular points of interest. I will then close the presentation with a summary of the broader business issues we are addressing in this challenging period and how we see our business prospects going forward.

Let me say upfront that those of you who listened into our 2011 full year conference call eight weeks ago, or who have met Wolfgang or I during the subsequent Results Roadshow, will not find much in the way of surprises in these results. I believe we’ve made it very clear over the past six months that 2012 would be a challenging year.

Certainly the first quarter has been every bit as tough as we expected, and predicted that it would be. However, our visibility has not improved to the point where we can yet predict a full year revenue figure for 2012. Nevertheless, we are still targeting to remain EBIT profitable in 2012 under the current circumstances.

Before I make my comments on our Q1 financials, let me just dwell for a moment on the reasons behind my sustained confidence in our mid to long-term prospects by setting the scene on where we see ourselves, as a company, by giving you three points to characterize our current status.

First, we have the foundations. As I’ve already said, times are tough, but we remain confident that we’ve built a strong and resilient foundation to the business, designed to protect the company in the difficult climate that the whole industry is currently operating in.

Secondly, we have the products. We have significantly enhanced our existing product portfolio over the last 18 months, so we are confident of being highly competitive in the event of a sudden upturn of demand in the market.

And thirdly, we have the roadmap. Despite the very volatile current economic environment, we have more than just sustained our MOCVD R&D efforts. We have accelerated our investments into both next generation MOCVD products and other, beyond LED technologies, that we believe are necessary to support our long term ambitions.

Let me now turn to slide three of our presentation, where I’d like to pick out some of the key financial highlights of the first quarter. On slide three, you can see a year on year comparison between the first quarter of this year and the first quarter of 2011. Reflecting the stark 12 month contrast in market conditions between these two quarters, revenues decreased by 80% from €205 million to €42 million at the end of the first quarter 2012.

Our gross profit decreased correspondingly by 90% year-on-year, to €10 million in Q1, resulting in a gross margin of 25% compared to 51% at the same time last year. Our EBIT came in at minus €18 million, down from €75 million compared to the same period of the previous year. This equates to a negative EBIT margin for the first quarter of 44%, a significant change from the 36% we recorded last year.

Accordingly, our net result was minus €12 million, and earnings per share fell to minus €0.12 in Q1, 2011 after a gain of €0.52 in the first quarter 2011. As we had predicted during our 2011 full year discussions, Q1, 2012 equipment order intake remained low at €31 million, only 14% of the €210 million we recorded in Q1, 2011.

The dramatic comparative reduction in demand was particularly evident in Asia, where historically, we have typically generated about 90% of our revenues. The most severe individual market slowdown in demand was in China, which had for the first time in our history, become the largest individual market for our systems in 2011 and consequently, where the abruptness of the slowdown in orders was most profound.

The equipment order backlog stands at €136 million, all of which we believe will be shipped during 2012. Free cash flow in Q1 2012 was negative at minus €5.6 million compared to a positive free cash flow of €12 million in Q1 2011. Wolfgang will elaborate on the effects which influenced this development later.

Cash and cash equivalents fell by 2% to €289 million as of March 31, 2012, compared to €295 million as of December 31, 2011. Let’s now move to slide four and look at the sequential quarterly movements.

Comparing the first quarter 2012 with the previous quarter; Q4 2011, the following picture emerges: Revenues were down 70% sequentially to €42 million, after a Q4 2011 performance of €140 million, which was strongly influenced by a few, but large shipments executed before the end of last year.

In contrast, the gross margin was up by 17 percentage points to 25% as Q4 was specifically influenced by a €40 million write down we took on inventory, which brought the gross margin of that quarter down to 8%. Net of that inventory effect; the Q4 gross margin would have been 37%.

Compared to the previous quarter Q1 2012 EBIT was down by 8% from minus €17 million to minus €18 million and consequently; our basic EPS decreased by 9% to minus €0.12 from minus €0.11 in Q4. Compared to Q4 2011’s order intake, we saw a slight increase in Q1 of 8% over the previous quarter of €29 million to €32 million, which could suggest that the current order intake levels may represent the trough level of the current cycle.

The equipment order backlog at the end of Q1 remained relatively stable at €136 million compared to Q4, 2011 with €140 million. In absolute terms, the minus €5.6 million free cash flow was an 80% improvement sequentially, but is favorably compared to the negative cash flow effect of minus €28 million in Q4, which at that time was strongly influenced by increased work in progress ahead of large shipments in that particular quarter.

Cash and cash equivalents plus cash deposits were marginally down to €289 million when compared to the €295 million recorded at the end of Q4. Let me now hand you over to Wolfgang for a more detailed overview of the Q1, 2012 numbers. Wolfgang?

Wolfgang Breme

Thank you Paul, and hello to everyone. Let’s move on to slide five at the consolidated income statement. As Paul already went through the key figures, I would like to focus on some details of our financials which I think are worth looking at more thoroughly.

First, cost of sales which decreased year on year, by 69% and decreased by 75% sequentially from €101 million in Q1, 2011 to €32 million in Q1 of 2012. This figure did not decreased proportionally with revenues due to a fixed cost effect from facilities and service activities.

It is worth mentioning that we include service and production cost in cost of sales. In this severe volume downturn we were not able to recover our production cost completely. If the volume would stay at this trough level for an extended period, we are prepared to reduce the costs further by using our flexible business model.

Second, our gross profit decreased by 90% year-on-year and 13% sequentially in line with the revenue development and the disproportionate decrease in cost of sales to €10.3 million in Q1, 2012, resulting in a gross margin of 25%.

Third, operating costs, operating expenses decreased slightly by 2% to €28.6 million against the first quarter last year and remained flat on a quarter-to-quarter comparison. This was due principally to a significant reduction in selling expenses, by 38% to €6.6 million, during Q1, 2012, from €10.6 million a year earlier, mainly against a backdrop of lower sales commissions and warranty expenses in line with lower sales volumes.

General and administration expenses decreased by 34% year-on-year and 36% sequentially to €5.8 million in Q1, 2012, principally due to sequentially a lower profit related elements of the administration costs and lower IT infrastructure costs.

Research and development expenses increased by 32% year-on-year and 12% sequentially to €16.4 million. Given our declared strategy to intensify our development activities further, as well as the opening of our new R&D center during last year, this should not surprise anyone and is a clear sign of the positive future we are building.

It highlights our commitment to this critical component of our strategy yet again. We added further personnel in this area and now have 328 engineers and support staff in R&D. Our material costs have increased in absolute terms; and so has our depreciation.

Four, the operating result decreased in a year on year comparison from €75 million in Q1, 2011 to minus €18 million in Q1, 2012 with a negative EBIT margin of minus 44% compared to 36% in Q1 of 2001 and reflects the effects described above.

In a quarterly sequential comparison, the operating result was €1.4 million or 8% lower than the minus €16.9 million in Q4, 2011, mainly because of the reduced sales volume. The relatively low reduction in the quarterly sequential result, in contrast to significantly higher revenues in Q4, of 2011, reflects the effect of the inventory write-down previously recorded in Q4, 2011 of the amount of €40 million.

In Q1, 2012 we recorded a tax credit from the capitalization of deferred tax assets of €4.8 million, leading to an effective tax rate of 28% of the result before tax. Fifth and finally, our net result was down year on year from €52.3 million in Q1, 2011 to a loss of €12.3 million in Q1, 2012, and 13% down quarter-on-quarter from minus €10.9 million in Q4 to minus €12.3 million in Q1, 2012.

Let me now move to a few selected figures on our – based on our financial position on the next slide. On this page, I want to elaborate on two main positions, inventories and trade receivables. First, on inventories, including raw materials, work in progress and finished goods, which increased from €184.6 million as of December 31, 2011 by 5.5% to €194.8 million as of March 31 of this year.

This is principally explained by increased prototype and laboratory tools in work in progress not being offset by sales of stored systems. This indicates that we were not yet able to return to our targeted lower working capital levels. It’s worth mentioning though that our inventory is in good and marketable condition and will give us a head start once the markets pick up.

Secondly, trade receivables decreased from €79 million as of December 31 to €38 million as of March 31, 2012, reflecting the reduced business volume in the first quarter 2012. Let me emphasize that AIXTRON as always operates on the basis of an exceptionally strong balance sheet and this has not changed at all since many years. We are not expecting any change here in the coming quarters. Let us now move to the cash flow during Q1 on the next slide.

Despite the loss we incurred in Q1 we were able to hold a neutral cash flow from operating activities. This underlines again the flexibility of our business model. Included in our cash flow from investing activities are additions or reductions of fixed term cash deposits. This is due to IFRS. The capital expenditures for tangible and intangible assets were €6.3 million in Q1 and are focused on R&D investments.

Our free cash flow therefore stood at a negative €5.6 million and reduced our cash including cash deposits to €288.9 million at March 31 from €295.2 million at the end of last year.

Let’s now move to the next slide our 24 month business development and which puts the scale of the reduction in order volumes into sharp focus. The figures, equipment order intake, equipment order backlog and total revenues mainly reflect the choppy waters we talked about in the past

As you probably know, the US-dollar denominated elements of order intake and backlog are recorded according to our internal policy at the current 2012 budget exchange rate of $1.40 to the euro. The 2012 opening backlog as of January 1, was subsequently revalued to €136.8 million from €141 million, reflecting the 2012 budget U.S. dollar euro exchange rate I just mentioned.

As discussed before, we recorded revenues in the first three month of fiscal 2012 of €42 million, a decrease of 80% compared to prior year’s figure or 70% when compared with Q4. The reason for this development was the decrease in demand for MOCVD deposition equipment for LED applications driven by the customers’ current reluctant investment behavior.

Let us now continue with the next slide and our customary revenue analysis. This is also a slide you are familiar with. Compared to the slide we talked about during the presentation of our full year figures, we see some changes which reflect our current business environment.

70% of revenues came from systems, the remaining 30% from spares and services, which differs from the ratios seen end of 2011 where 91% of revenues were from systems and 9% from spares and services. Still the large majority of our systems, namely 56%, are used to manufacture LEDs, primarily for backlighting purposes, but increasingly also for general lighting applications.

Due to the low overall level of revenues, the pie display and others containing revenues from upgrades, R&D systems or systems for other applications as power electronics shows a large share of revenues, namely 43%. Regionally, 76% of revenues were generated by sales to Asia. The remainder is split in 8% by sales to Europe and 16% to the American states.

This reflects the currently low demand from Asia for the previously discussed reasons.

Ladies and gentlemen, thank you for your attention for now. Let me hand you back to Paul for his concluding remarks before we will open the floor for your questions.

Paul Hyland

Thank you Wolfgang. Before we finish the presentation, I would like to summarize the operational points we’ve presented to you today and then give you our perspective on the broader business issues we are addressing in this challenging period.

So, in summary; I think that we’ve made it clear, that as expected, Q1 has been a tough quarter and that we do not expect a dramatic improvement within the first half of 2012. I think that we’ve also made it clear that we remain more positive about the potential prospects in the second half of 2012 and into 2013. But we’re not yet positive enough to be able to commit to a 2012 full year revenue guidance. However, we are still targeting to deliver an EBIT positive performance in 2012, providing circumstances don’t change significantly.

We remain confident in our business foundations. We have a solid balance sheet, sufficient cash and no debt. Such strong foundations enable us to continue a healthy R&D program through which we can strengthen our existing products and services. We believe that our current product portfolio consists of the most productive technologies available on the market, but we intend to continue to work on improving our products and services, as well as adding more products to our portfolio.

The opening in March, of our demo & training center in Suzhou, in China, is both evidence of our improved customer service support and represents an increased physical presence in arguably the largest potential end market for LED lighting. In addition to current product development enhancements, we have also increased our MOCVD future product development activities and R&D investments into new technology and market areas in order to prepare ourselves for future LED and beyond LED opportunities.

Before closing the presentation with our updated EBIT break even model, let me now share some broader business issue thoughts with you, as to where I believe the LED industry is now and the status of the transition between backlighting applications driven demand, towards the emergence of general lighting driven demand and the impact on the need for LED production equipment.

I would compare the market lull we are in now, with being in the eye of an investment storm and so it’s important to recognize how that storm delivered us to where we are today, before we can speculate on where we will be in the future. If you look at our revenue history as far back as 2003, up to the present day, it’s not difficult to draw a very positive trend line that any new emerging technology would be very pleased with.

It is, in fact, only the last two years, 2010 & 2011, that stand out as positive exceptions above that trend line and clearly, 2012 will be below that trend line. In my view, there are four contributing elements that have created the extraordinary beyond trend performance in these two years and the inevitable below trend performance in 2012.

Number one, the initial 2008/2009 financial crisis drove our and most other industries order levels down to close to the lowest we had seen in the preceding decade. By Q1, 2009 our order intake had dropped by two thirds of what we had been receiving 12 months before.

The second element, the surprise introduction timing of Samsung’s LED backlighting products in Q2, 2009 led to a surge investment period by nearly all LCD players. In the following 12 months, our order intake rose more than five fold.

Third point, step forward to 2010, national and regional subsidies and strategic investments in China, supported by a Government five year strategic plan to create a sustainable Chinese LED industry, extended the backlighting investment cycle for another year and a half, peaking, for us at a record order intake level of €222 million in Q2, 2011, about 30% higher still than that high Q2, 2010 figure.

The height of this last, purely strategically driven investment peak, has simply added to the excitement factor if we can call it out of the rollercoaster effect we are coming to terms with now in 2011 and 2012. And the fourth element, the continuing fragility of the economy, especially in the Euro zone, led to increasing global consumer uncertainty, credit tightness and specifically in the LED industry; a timing imbalance between capacity too much, capability not enough and consumption not enough yet.

My argument is that these four extraordinary, perhaps even; artificially induced elements, created a positive investment storm and that we are currently in the eye of that storm. As I firmly believe that the vast majority of LED backlighting capacity has already been installed, the time will take before the second half of the investment storm hits us, namely a resurgence of production tool demand will depend principally on just two factors.

Firstly, the speed at which LED lighting applications are adopted. I am very encouraged by what I saw at the recent Frankfurt Light and Building Fair and even if I take the more pessimistic predictions I’ve recently read; i.e., “not until 2014” then the equipment investments would still have to be made in 2013.

Although a lack of visibility means that we still can't predict a precise revenue figure for 2012, I still maintain that we will either see a slow climb in demand during 2012 and much bigger demand in 2013, or it will remain flat in 2012, but still a big increase in 2013.

I should say here, that we are seeing increasing quotation activities, but it is too early to say if this will translate into purchase orders in the short-term. The second factor is the speed at which the current overcapacity can be utilized. I don’t think that we are alone in regularly reading that customers’ capacity utilization figures are increasing and I don’t think that we should assume that all of the current capacity is necessarily capable of delivering the expected device quality and quantity the LED lighting industry will demand.

The point I would make is that the current eye of the investment storm market environment we are in now is not permanent and although we would not choose to be here, that the only real benefit of being in the eye is that it gives you the opportunity to clear the decks from the first half of the storm and to prepare for the second half. That’s exactly what we are doing.

Let me now conclude our presentation by giving you an update to our EBIT break-even model on the next slide, slide 11. The dark blue segment at the top right of the pie chart on slide 11 shows you our Q1, 2012 revenues of €42 million. The light blue segment on the bottom right hand side shows you the €136 million of system orders in our order backlog, which we expect to deliver this year. You can see in the grey segment of the pie chart that we are expecting about €30 million to come from spares revenue during the remaining three quarters of 2012.

Finally, in the red segment on the left hand side of the pie chart, you can see that we need to receive about €67 million of shippable orders in the course of this year, to achieve the EBIT profitability point in our model.

Ladies and gentlemen, this concludes our formal Q1, 2012 results presentation and thank you for your attention. Wolfgang and I are now available to answer your questions.

Guido Pickert

Thanks Paul. Let me make one more remark before we hand the call over to the operator for the following Q&A session. Since we are bound to have a long list of people wanting to ask questions, could you please limit your questions to a maximum of two each time and this will hopefully allow everyone to ask their questions.

You are of course welcome to join the queue again if you wish. Your cooperation on this is much appreciated as always and I will 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) First question comes from Simon Schafer from Goldman Sachs. Please ask your question now.

Simon Schafer – Goldman Sachs

Yes, thank you so much. My first question would be on just how you’re thinking about the slope of revenue. Then I think for you (inaudible) you saying, you’re basically thinking an order trough has been reached. But obviously that doesn’t mean that orders can’t – sorry, that revenues can’t decline from here. But just sort of immediate, have we reached the tough in sales as well or that still rolling off?

Paul Hyland

I would think so. I mean, we have as you know from what we said €136 million, they are scheduled during the course of the reset of this year. One of the advantages of carrying some stock over from some of those orders that you know we – that were canceled or disappeared last year, is that we’re able to respond fairly quickly. So, I think it does depend some degree of the speed that we see all these coming. But we can respond fairly quickly. But we shouldn’t expect, I think I did say, if one get dramatically better I think in the first half, then we’ll see a lot of it was down to the order intake. But second half I’m hoping will be better.

Simon Schafer – Goldman Sachs

Correct and my second question will be on market share or maybe talk to us a little bit about [price] and latest acceptance. I guess [to pan] this question, are you looking at a stabilization or perhaps doing a reversal of some of the market share that you’ve given to recover isn’t it, thank you.

Paul Hyland

I hope never give up market share, I’m sure they’d say the same. It’s a healthy competition. I mean, we’re pretty confident that at least, we’ve made a number of significant enhancements to the product over the 18 months. Just and around the cost, a lot of customers are somewhat reluctant to play. So we’ve had a lot of good qualification, very positive response to those products. And certainly, we feel we’re in a good strong position. So, this I think I stated in the call, if I we were to suddenly see a big pickup, then we already think that we have a very strong product portfolio. But further downstream, there’s no question and if it links to around determination to carry on our investments, I think we are coming to a point where. The industry is going to support a lighting industry with all the cost of ownership and pricing pressure and performance issues probably is going to be using different equipment to that which we’re even selling today. I mean we’re in for I think a very busy period over the next five years. I’m sure its going to need better and better products. But from market share wise, we continue to be where we’d hopefully be with. We’re competitive and we expect to get stronger.

Operator

The next question comes from Uwe Schupp from Deutsche Bank.

Uwe Schupp – Deutsche Bank

Yes, good afternoon. Thanks for taking the questions.

Paul Hyland

You’re welcome.

Uwe Schupp – Deutsche Bank

Paul, how do I reconcile basically your comments about well on the one hand, still not being able to give a full year guidance for the year with the other comment you made that Q1 might be on the trough. And in that regard, maybe a bit further granularity with real overcome with regard to current quote activity. What are your discussions with customers currently, and given that we hear that some of them are backed at 100% utilization as we speak?

Second question would be, on the non-LED business which was actually quite quick in the quarter. Based on your IR presentation, the most recent one you put up earlier today. You reckon that the silicon business moving up towards high volume business, just curious of as to what that means? What is the revenue opportunity? What’s the potential customer base, and maybe a bit more granularity on that business as well? Thank you.

Paul Hyland

Okay, in terms of the – we’re definitely seeing more activity in terms of quotation level. And you’re quite right. We have seen a number of people now reporting very highly utilization close to 100% in some cases. But of course a lot of that is coming from backlighting applications. And I don’t think it necessarily means immediate turn-up in business, partially because I think certainly customers from the discussions we’ve had are more reluctant to commit immediately to big capital spending. And we see more discussions in the short-term on how they can either improve the products with the current performance to get more outlook or indeed in some cases for upgrades.

But people are still talking to us about quotations for next systems. So you can send, the market is encouraged by greater utilization, but it is not yet confident enough to start placing orders. Now, why can’t we fix a revenue at this stage, well of course it is still very much dependent on how those orders come in.

We’re in a position this year where we can actually turn product around a lot quicker than we have done before simply because we’ve got a lot of it around us. So that’s the principal reason. If we could give you a figure that we were confident in right now we’d give you one. But we still remain confident that we can be EBIT profitable.

On the non-LED revenue and you referred to our IR presentation. It’s not new that we’ve been investing in other areas apart from LED. Obviously, a semiconductor position also in organic semiconductors, and you’ll know that we have a business doing carbon nanotube and grapheme applications. In the course of the next two quarters we will be shipping systems for all of those applications to customers, but of course not all of them will necessarily be recognized as revenue in that period. But certainly for the last 12 months I think we had a very successful period and it links why we have so much R&D.

Typically R&D goes up when you’re cutting metal. And cutting metal and putting systems into the lab is an important process of the qualification process. So we’re optimistic that we can drive a spread of technology revenue in the next 12 to 24 months. And we should start we will certainly be seeing shipments in the next two quarters. But it won’t necessarily flush through to the bottom line straight away. Obviously revenue recognition rules being what they are and it won’t necessarily immediately mean revenue.

Uwe Schupp – Deutsche Bank

Does you comment already include OLED as well?

Paul Hyland

Organic semiconductors. This is an area which is obviously a great deal of interest. If you saw frankly, you’ve already seen I’m sure some of that lighting or it will be somewhere away before it hits the mass market. But yes all that is one section of organic semiconductors where we are getting more interest.

Uwe Schupp – Deutsche Bank

Thanks.

Paul Hyland

Okay.

Operator

We have another question from Sandeep Deshpande from JPMorgan.

Sandeep Deshpande – JPMorgan

Hi, I mean coming back to that question on OLED, what is Aixtron doing in terms of tools for the OLED market, because I mean in the Frankfurt Fair there were lots of future applications using OLED lighting. I mean have you had any wins in terms of being able to supply tools in that market.

And then secondly with regard to the current business itself, I mean how confident are you on the existing backlog. I mean that this backlog that you have, will definitely shipped through to the next 12 months and that there is no risk in this backlog?

Unidentified Company Representative

I think the first, OLED display system we shipped I think was early 2003 or 2004, which we shipped to display manufacturer in Taiwan. And we’ve shipped a number of systems to different research institutes and publicly funded projects. I think the next most notable system in the last three or four years was Plastic Logic.

It was looking at sort of a kindle-like application and also it took a system from us and we’ve certainly seen a big pick up and by the way I think that’s we have an application we have a platform that is already capable of Gen 3.5 and obviously we’re looking at what the scaling issues are beyond that and that’s part of our development work. And but we’re certainly seeing a greater degree of interest in the particular technology. We think we’ve got some very strong US peak on our particular technique on OVPD. And certainly we’re getting a lot of direct interest and we will be shipping systems to customers for evaluation in the course of this year.

So it’s not a new technology for us. And in fact if you look at it closely it’s very closely aligned. We leverage if we like the technology and the experience we have with MOCVD. There is a lot of synergies with that MOCVD expertise.

I think the other question you asked was about the order backlog.

Wolfgang Breme

Hi Sandeep, yes is the answer. Yes we’re confident with our backlog, because you know our strict rules which we had in our revenue – the recognition of backlog. Nevertheless of course we have seen last year that especially in this very strong growing Chinese environment shipment dates may shift. That’s always to risk but we’re very firm. You can see currently we have very high percentage of down payments. If you compare to the backlog yes, we’re absolutely firm on that. And comparing the backlog with the inventory shows that we’re able to react very quickly and also then to deliver our full year guidance in terms of revenues.

Sandeep Deshpande – JPMorgan

And then how much of the backlog is [transparent]

Wolfgang Breme

If I can just add some thoughts I mean if you look at – we state quite clearly what the conditions are that we have for recognizing orders. And then you also note at the end of that we still even if they pass all of those requirements still have management and right to sort of make a judgment on the likelihood of it becoming realizable revenue. And really since the 18 months ago, I guess what can we say, we look even more closely. It’s a difficult judgment call to make, but nevertheless we’re pretty confident that we can deliver all those systems

Sandeep Deshpande – JPMorgan

What percentage of this backlog Paul is China related?

Paul Hyland

The majority is China related.

Sandeep Deshpande – JPMorgan

Major. Thank you.

Operator

The next question comes from Olga Levinzon from Barclays Capital. May we have your question?

Olga Levinzon – Barclays Capital

Hi, thank you for taking the question. Just wanted to follow-up on your breakeven model if we do assume that the June quarter you’d see pretty similar levels of revenues and gross margins and you do hit $275 million has a revenue target. That seems to imply that you would have to get to about 46% gross margins in the second half of the year at a $90 million to $100 million revenue level. It seems a little higher than levels that you’ve achieved with those revenues in the past. Just wanted to see if you’re already implementing steps to cut down the fixed proportion of your costs or how do you think about that margin mix going forward?

Paul Hyland

Hi, Olga as I said in my comments to the profit and loss account. I mentioned it. If we would see a further continuation of this trough cost we have to touch on some more costs. And in order to sustain especially the gross margin. And we’re confident to reach this target and then having the simple model, which gives us revenues of $275 million, 40% gross margin. Of course it’s a fine line we’re working. We have to work here because we have to be prepared for the upturn. And if it’s really that if we’ve reached the trough now we should not lose of side of the fact that the upturn may come up quicker than some of the people in the market thinks with the fine line, the method is yes, we are reducing our cost. The only cost which are not – will not be touched at this point is R&D because we need R&D for the development of the next generation systems on different fronts of our product portfolio. Another what it was mentioned before, if you look at our silicon business which has been very quite for couple of years, which also gives us some confidence is the development we are currently seeing in this field. So, there’s also will support our target of at least reaching the breakeven point for this year.

Olga Levinzon – Barclays Capital

Got it and then just as a follow up question on the breakeven models, how much of the revenue that you’re – of the €275 million, how much of that is coming from non-LED system shipments, so that would include power electronics and some of the other markets so you’ve discussed.

Paul Hyland

I mean, we are of course is still an LED company that comes to the higher volumes. So I would assume that up to 30% or so may come from other applications. But the majority and it’s really delivery of what we have now is clearly depending on the LED market.

Olga Levinzon – Barclays Capital

Got it. Thank you.

Operator

A further question comes from David Mulholland from UBS.

David Mulholland – UBS

Hi, thanks for taking my questions and just follow up on the OLED and silicon tools that you’re shipping out this year and are these all production systems and can you possibly give us some color on how many customers are working with in each end-markets that are just taking tools and then I have a quick follow-up?

Wolfgang Breme

Prefer not put too much color into. We are shipping both R&D systems and customers and systems are going into production is to multiple and I think I can say that vast majority are in Asia. But we're being reasonably coy about the detail behind that. But as you – like I said earlier you can probably sense that just from the R&D, because it is a lot of work going in that area and it’s not difficult to spend a lot of money in organic system technology is a big, big systems.

David Mulholland – UBS

And I remember previously you always talked about getting into the NAND space, that’s sort of sub-32 nanometers. Is there any update – given the color you’re seeing from customers as to what node size you think you might be able to get back in your memory?

Wolfgang Breme

We would expect to ship into production systems not below that level, sorry – above before that level. We’ve actually made some very good progress in the last 12 months. We will be shipping systems into production this year. Yeah.

David Mulholland – UBS

Okay, thanks and just one quick follow up. In terms of the gross margin level, should we look at there being any difference, historic shipping level more from the silicon end of that business or is it still group average?

Wolfgang Breme

It’s ever – comparable margin because there we are all under the same target and under the same assembly or production in the supply chain model.

David Mulholland – UBS

That’s very good. Thanks very much.

Operator

We have another question from Bill Arnold from B. Riley & Company.

Bill Arnold – B. Riley & Company

Yes, good afternoon gentlemen. With orders at €31.5 million, that translates to about 15 to 18 machines in the quarter. About how many of MOCV tools are being ordered for high power or non-LED applications and what’s the typical number of tools being ordered for non-LEDs?

Unidentified Company Representative

Just one question (inaudible) are you talking orders or you’re talking revenue?

Bill Arnold – B. Riley & Company

I’m talking about orders. So you placed €31 million that translates to about 15 to 18 machines being booked in the quarter?

Unidentified Company Representative

Yeah, so to give you a number, I say also that the order intake mix in the first quarter is let’s say, let’s call it one-third is on the driven by LEDs and then, over the – let’s say, 50% is other applications and a big portion of this 50% is of course the power electrics. But I would not overestimate it, because the numbers are very, very small. As I said in one of the – to the other questions, still we are still depending on the LED for the majority of the volume going forward. This cannot be recovered by a current silicon power application.

Unidentified Company Representative

And they don’t tend to be big volumes with each order. So it’s still relatively – we don’t get customers in that area, building volume, big multiple system orders.

Bill Arnold – B. Riley & Company

So, what that means is that, about ten machines give and take is for high power devices and other type of non-LEDs and you probably will keep that type of run rate, maybe a little bit better over the course of time?

Unidentified Company Representative

Yeah, for the quarter, it sounds reasonable, yes.

Bill Arnold – B. Riley & Company

Okay, great. Thank you very much gentlemen.

Unidentified Company Representative

Okay.

Operator

The next question comes from Carter Shoop from Key Banc.

Carter Shoop – KeyBanc Capital Markets

Yeah, hi, question for you. It just regards to the breakeven target. Maybe another way to look at it, is, based on what we’ve seen over the past two months and when you initiated a guidance, would you say you’re more or less confident than when you initiated that guidance?

Unidentified Company Representative

Good morning. We feel very confident to reset, that always with the side comment saying, we need enough tick in the second half of this year and we’re still in the eye of the storm, as Paul would say.

Unidentified Company Representative

And I still am positive. We’re going to see a pick up in maybe 2012, certainly in 2013. I think you just have to look around and look at some of the company positioning is going on and some of the movements going on and we’ve talked about – we’ve already heard people talk in the course of the this last couple of weeks of even bringing in Europe sort of sub €10devices et cetera. There is a number of people Panasonic and Mitsubishi clearly are looking at positioning themselves now, but bringing products into Europe.

I think where ever you look, that substantial signals that the industry is beginning to get ready, is about now the timing takes before like commit to making serious investments in manufacturing. But I do think we stand a very good chance of saying in more – certainly a more positive second half and maybe a much more positive 2013. It’s just a question of timing.

Carter Shoop – KeyBanc Capital Markets

That’s helpful, thanks. And then, as a follow up question. Can you comment on the black market for used tools in China. Any update there would be appreciated. Thank you.

Unidentified Company Representative

I would say that it’s of course our trends for this tools – from tools from time-to-time also in China. But the market itself looks very stable if you will look at the volume players. If you look into the market research you can see that there is currently a group of the 10 bigger players in China evolving, which are dominating the net market for the tools. The rest is I must say, not very significant at this point. Of course we know that in China the target of the government regulations is to consolidate. So we could expect that tools will be either relocated or the companies will be transferred from one group to another group of companies. But this of course does not influence install base by itself and so we believe of course that there’s a huge number of tools which is – has to be ordered to cope with the increased demands that it is for lighting applications.. So, for us, as a manufacturer, I would say, this is not really a topic which gives us a lot of voice.

Unidentified Company Representative

I think it’s – fairly clear, there’s a high potential for consolidation in a market that’s grown so quickly in such a short space of time. So – but I think it will be an acquisition story rather than the development of some grey market and huge movements of systems around for a number of perhaps fairly practical reasons and that is – I think if a city or province has actually given you the money for these systems, the ability for you to sell them cents on the dollar to someone else, to put them on the back of the truck are pretty, pretty remote. I think it’s more likely, the consolidation will drive, the importation of expertise into an area to make those systems work. There is clearly some grey market. You can see already some people beginning to get in trouble and, there’s certainly a lot of people popping up that are interested in the grey market, but we haven’t seen any significant movement yet. I think it is difficult, just by nature of the technology, you can buy a system from someone else and if you don’t have the same recipe, process et cetera, there are significant issues, in quality, consistency issues.

So, I think it’s – it’s a possibility but I think it’s probably over done at the moment. We’ll see what happens as the industry begins to mature.

Carter Shoop – KeyBanc Capital Markets

Thank you, and good luck.

Unidentified Company Representative

Okay, thank you.

Operator

We have a further question from Colin Rusch from ThinkEquity.

Colin Rusch – ThinkEquity

Just, thinking about your revenue discussion, through the balance of the year. It sounds like you’ve got a nontrivial amount of non-LED equipment. Can you quantify that for us?

Unidentified Company Representative

As I said before, Colin, the majority of the business going forward to the end of the year will be of course, LED. There is – as I said, an increased proportion of silicon systems in there. If we are able, with our new tools to recognize the revenues, which looks promising at the moment. I’m not prepared to give out this number at this stage, because those systems are currently being built and then later being shipped in the quarter. And also what I said before the power electronics and other markets are relatively small compared to the LED market. On top of that, we will see some first shipments for organic semiconductor systems and also here the timing and revenue recognition is something, which would prevent me at this stage to see how much this can be in the quarter – in the year. But the whole of the year, of the year, the LED market, and recently the Asian LED market, will be for us the most significant portion in our revenues for this year.

Colin Rusch – ThinkEquity

Perfect. And then can be just a little bit more specific about lead times? Say somebody placed an order for 20 or 25 tools today, how long do you think you would take the ship that order.

Wolfgang Breme

It depends of course on the configurations, if you meet configurations, just you know our, our inventory position, if you would meet configurations we have on stock, we can be very quick. So we can ship to you in a quarter, if you would order systems now, we maybe able to ship in the quarter. But as you know, we are not always able to ship as you want to ship, because we need for most of our tools into Asia, we need export control licenses, so, therefore, we are depending on the authorities.

Colin Rusch – ThinkEquity

Perfect. Thanks a lot guys.

Operator

The next question comes Janardan Menon from Liberum Capital.

Janardan Menon – Liberum Capital

Hi, thanks for the taking the question. Just going back to the increase quotation activities from your customers, I just wondering what would it take to tip them over the fence and put a purchase order for those quotations? Is it going to be further strengthen LED backlighting demand into the third quarter or does it would have need a clear improvement in the LED lighting market, or is it more a macro economic situation. Small follow-up is, question is, you said, just to understand what you said previously, are you saying that you are already in discussions with your customers and qualification with your customers for your next generation tools, even though, you haven’t made a public announcement of what this tools are to us and the rest of the world.

Paul Hyland

Well, first of all on that point, I mean, we obviously, some of these developments do take sometime, we will quite often perhaps focusing on one or two key customers and we will engage with them perhaps a little bit earlier than generally. Because obviously what we want is to make sure that we’ve got very much sort of a market-led product. So we’d like to try to engage some of the key players. But, we are not talking about dates here today.

I think your question you asked me about the quotation. Well, of course, some of it’s just very obvious in the sense that once an industry starts to the utilization climbs, as it does, and you are hearing of people even claiming 100% utilization, certainly 80% is not uncommon. The closer you get to that full utilization, it's proportion to the number of requests you get for quotation. But you can see that customers are looking in exploring all options. They won’t try to work out, okay, how quickly could I have a system if I need one, could I upgrade this system, there is a whole variety.

But just the dialog itself for me is a good indicator, because it’s a real indication that customers are beginning now to think and plan. And in fact, we are seeing, I think read recently, isn’t it company TCP, I think is one of the world's largest CFM manufacturers talking about IPO and readiness for transition over to LED applications. Just the general level, also customer level and the funding activities, to me, I’m sure, it’s just not my interpretation – is an indication the industry is beginning to prepare itself. How long it takes to actually kick off and I think, we are not pretending to know, in my view, it’s sometime in 2012, 2013.

Janardan Menon – Liberum Capital

All right. Thanks a lot.

Paul Hyland

You’re welcome.

Operator

We would like to hear the next question from Francois Meunier from Morgan Stanley.

Francois Meunier – Morgan Stanley

Hello, it’s Francois. Can you hear me?

Paul Hyland

We can, Francois. Yes, go head.

Francois Meunier – Morgan Stanley

Sorry, I was having a problem with the line. Yes, a quick question, because obviously, we don’t expect any pick up in demand this year. But let’s assume that at some point next year, there was a pick up in demand, as we’ve seen in this end market when people order tools, they all order tools at the same time. How easy will it be to basically ask your suppliers to ramp up production of part to make the tools? So basically how flexible are you to ramp a production.

Paul Hyland

Well, I mean that’s the discussion that we are having now in everyday, not just because we expect it to happen straightaway, but because we outsource the vast majority over 90% of our manufacturing. And we have to have a very close contact and indeed get discussion with our customers, because we are constantly talking to them about their capabilities and capacities and their ability to be able to ramp up. The one advantage if what we had to cope with in the first half of the storm, which was this massive explosion in demand was, we went through a very big learning of not only how to make and test more systems ourselves, but also the suppliers we had and all of them are in tact, I’m glad to say, despite a very difficult downturn, but we work very hard to try and keep those guys informed as to what if and what we think might happen. So, I think we would be reasonably comfortable that they would be able to cope. But we are watching and we are planning and we are continuously planning what would happen if that happens quickly. But let me absolutely clear, we are not predicting a rapid takeoff immediately. We are just seeing encouraging signals that suggest to us over the next 12 to 24 months, we are going to be busy again.

Francois Meunier – Morgan Stanley

Okay. So basically there is no supply of parts which has kind of gone bankrupt, because basically not selling anything or not much to you anymore.

Paul Hyland

As much as we possibly can, we try to avoid obviously single source situations, we are constantly looking at trying to develop supplies, because it’s in our interest that they are not just dependent on us. We’ll work very hard in this area both in engineering and in purchasing. So it’s something you have to pay attention too, though, which is [similar to fair] question.

Wolfgang Breme

(Inaudible) side comment, we should not forget that we are part of the very big semiconductor industry, which is currently in good shape. And most of our supplies also have worked in one of the other way in supply to other silicon semiconductor equipment manufacturers and this is a very big market.

Francois Meunier – Morgan Stanley

Okay. So let’s hope for the best for next year.

Wolfgang Breme

Yes.

Operator

One more question comes from Timothy Arcuri from Citigroup. Your line is open now.

Timothy Arcuri – Citigroup

Hi, guys. A couple of things. One on inventory and one on backlog. Paul, if I look at the inventory, you have a €194 million in inventory on less than €50 million in revenues, if I just compare that to say Veeco, they have much, much less inventory on a much larger revenue base. And I know that they have other businesses, so it's not sort of an apples-to-apples, but I’m still wondering, why the inventory is so high and whether there is a risk to some of that being written down, one. And number two is our backlog, Wolfgang said that over 50% of the backlog is in China, but you are also counting on that shipping to get to your EBIT breakeven. So, I’m wondering that gives you confidence in the China portion of the backlog, actually shipping. Thanks.

Paul Hyland

Okay. Right, backlog. I'm sure John will talk to you about his inventory, so I won’t try and comment on his. But, certainly, we had a GCL order, as I’m sure you know which disappeared and we can use some of it, but we are not going to tear it apart and convert into someone else's product. We will be patient and use the when the correct configuration comes along. Number two, we are significantly increasing the R&D, so the inventory includes all of this stuff, it’s currently going into our R&D facility, and I think Wolfgang has already talked about, so the percentage terms of increase in R&D. And we have a substantial amount of our manufacturing people, right now building systems in R&D. So that’s the – and if I can just maybe clarify this thing on backlog, I mean, we talk about the – well, clearly China is still a developing and therefore a times volatile market, but the actual backlog, over 80% of our backlog is going to Asia and it has been more than that obviously, when China and Korea, et cetera were spying a lot, but it’s about 80% Asia, and I would say about 50% of that run about that is going to China. So there are of course, risk and we shouldn’t just concentrate on China, this is a difficult market. This is as much an issue, where it’s about cash, it’s not about nationality. But we are varied with pretty cautious, we try to take a nice, clean view as to what is realizable and what isn’t, and of course, there is risk.

But then again, we are not were necessarily reporting the orders we’ve got. As we’ve talked already once or twice here about our non-LED business, those orders won’t get reported as orders until such a time as we are able to fulfill our own internal criteria on those. So we’re still reasonably confident that we can deliver what we say we’re going to deliver for this year. It’s not just about depending on Chinese customers to take systems. I think we’ve already taken the tough decisions on that. So the orders we’ve got, we remain confident that we can deliver to them.

Timothy Arcuri – Citigroup

Okay, Paul, thanks.

Paul Hyland

You’re welcome.

Operator

Let me now open the line of Aaron Chew from Maxim Group. May we have your question?

Aaron Chew – Maxim Group

Hi, good afternoon.

Paul Hyland

Hi.

Aaron Chew – Maxim Group

Thanks for the question, guys. Two if I may, first, I wonder if you could just maybe discuss a little bit more the impact of the inventory write-downs from 4Q on first quarter results? I mean first wondering if it was price declines or obsolescence that was the bigger driver of the decline, and wondering if maybe you could just touch on what gross margin would have been without the inventory write-down.

Wolfgang Breme

Aaron, to make it clear, the inventory write-down happened was booked in Q4.

Aaron Chew – Maxim Group

Yes, I understand. So by lowering your cost of goods sold inherently probably boosted profitability during the first quarter. I’m wondering if you could maybe quantify that.

Paul Hyland

No, no.

Wolfgang Breme

No. There was no impact, it was simply a correction advancement, which went through P&L in Q1 and Q4, and had no impact so far in Q1. But of course, you’re right, assuming if we would be able to shift those systems, which were devalued. I mean, they are still there, as I’ve said, they are marketable and good condition. This could boost the gross margin going forward, yes.

Aaron Chew – Maxim Group

Okay.

Wolfgang Breme

Asking the previous question, of course inventory is still high, so the €40 million we took simply as a precaution in order not to overvalue our inventory. But you’re right, if you assume, if we were to ship systems, which were devalued in Q4, this would boost the margin very clearly.

Aaron Chew – Maxim Group

Okay.

Wolfgang Breme

I would be very happy to book this.

Aaron Chew – Maxim Group

Okay. All right. Thank you. And my follow-up is could you touch on a little bit, what’s going on with the DSOs? I mean obviously your AR, your trade receivables came down sizably, but as your revenue did too.

Wolfgang Breme

Yes.

Aaron Chew – Maxim Group

So your DSOs jumped over 80, I mean is that really a reflection of just easier payment service right now or is that a reflection of just some of the older historic receivables just ageing?

Wolfgang Breme

It’s basically higher because you can imagine, we shipped. We were very successful to, say in, shipments and revenues in Q4, in every respect, market share was whatever, but those systems are still, I mean they’re shipped into China. It’s obvious they are shipped to a very limited number of customers and they need some installation time. The payments are secured for the next couple of months and we expect them to come in this quarter and next quarter. So it’s still longer because you can imagine shipping a huge number of tools into new facilities that we have slightly different payment terms than usual.

Aaron Chew – Maxim Group

Right.

Wolfgang Breme

But they are all secured by [a fees] and I’m quite comfortable to get the money, that’s the only reason. I believe they have the customers, a very limited number of customers.

Paul Hyland

As you were just clarifying this point, Wolfgang, we’ve seen a slight change in the model. In the past, it wasn’t unusual that the shipments in one quarter, you will then see the almost pure profit, final acceptance in the following quarter. And of course, what we’ve seen recently, particularly in some Asian markets, is that that last and highly profitable final acceptance takes longer to actually draw through. And therefore the normal ratio of the timing on profitability and the margin effect can be quite significant if those final 30 page, we say, drag for a few quarters. But that’s just something that we have to live with in this particular market environment.

Aaron Chew – Maxim Group

Okay, very helpful. Thanks for the question guys.

Wolfgang Breme

You’re welcome.

Operator

The next question comes from Andrew Abrams from Avian Securities.

Andrew Abrams - Avian Securities

Hi, guys, thank you for taking the question. Just two things; first of all, what are you seeing on financing from China? And how is the financing being done these days given the government is a little less involved? And is it all large companies and the smaller companies that were being financed by the government are kind of dropping out? Maybe you can give some perspective there.

And also just on the break even model, if we are talking about €67 million of shippable equipment orders required, would that be through the end of third quarter? Meaning that, something that was ordered at the end of third quarter would still just be able to be delivered in the fourth quarter or can you kind of roll further into the fourth quarter with those orders?

Paul Hyland

I’ll pass over to Wolfgang in a second, but a couple of quick ones. Clearly, a lot of the very big customers that we’ve seen from China in 2010, 2011 have had quite a lot of sovereign fund investment, and certainly very, very substantial, as you might have mentioned, but it’s not exclusively. Certainly where we’ve seen private equity investment, there are a number of fairly substantial companies who can place substantial orders, but certainly the credit tightness that we’ve seen happen over the last nine months has had a distinct effect on those.

And indeed the collaborative arrangement we have with machine finances, we’re not engaged in that in any direct form, and there’s no benefit to us. It was that we do accept that there are a number of customers in China who are now exploring, should we say, more conventional finance options, but it is more difficult, and certainly there are some issues.

I’ll let Wolfgang finish that up. Very quickly on your second question, certainly Q3, and indeed maybe even squeezed into Q4 given, as Wolfgang says, in many cases, it’s a question of configuring the systems that we have. So it’s not impossible that we couldn’t be taking and shipping even in Q4, but we shouldn’t get carried away with that. That’s something we’ll put on the back shelf, but certainly Q3 and that’s not an issue for us.

Andrew Abrams - Avian Securities

Thanks

Paul Hyland

Do you want me to just finish up on the financing, Wolfgang, anything to add?

Wolfgang Breme

Yeah, maybe on the China market, Andrew, I just spent last week in China and I was talking to a lot of government officials, and the key target of China is always conform this LED lighting in conjunction with their organization projects. And it’s hard to believe that money is really an issue in China if the government wants to invest. I think as far as if we take the whole supply chain of LEDs that some shortages may come up, but the big sovereign companies, the SOEs, the state owned enterprises, clearly have no shortage, it’s simply an execution of a program at this stage. So it’s tended to a whole back for us.

And also if you look at subsidies, the subsidies for the whole LED industry are just shifting, they are not canceled. The only thing is if you talk to the executives in the government, their task is to stimulate the value chain in total and that is thinking how to do that in the most efficient manner. I would not see a real financing problem for the bigger players moving forward.

And I still believe that China will full stream move into LEDs when once I believe that this technologically now really possible, that just for instance, in the process of transferring the LED supervision from the science and technology minister to the industry ministry, so you can see that they are really focusing on building the whole value chain and I’m very confident that state money plus of course private banks will finance this industry build up.

Wolfgang Breme

And we shouldn’t forget, over 70% of the world’s light bulbs are already made in China, so there is very good commercial motivation to make the appropriate investments. The fact that the subsidies have moved downstream, I don’t think it’s actually necessarily a bad thing, because in order for the systems that have been installed to have some real commercial traction, they need to be able to add capacity into devices. So subsidies which will encourage both light bulb or light lumens and performance improvement, actually in the long term, will be very good to keep this momentum going in China.

Andrew Abrams - Avian Securities

Great. Thank you.

Wolfgang Breme

You’re welcome.

Operator

The next question reaches us from Jed Dorsheimer from Canaccord.

Jed Dorsheimer – Canaccord Adams

Hi, thanks for taking my questions.

Wolfgang Breme

Hi, Jed.

Jed Dorsheimer – Canaccord Adams

Just two, I guess. I guess, first Paul, for you maybe I was curious if you can give a little bit more color on some of the hesitation in the near term on the customers? Do you think it’s a function of fear that there has been double ordering that is causing the utilization rates to increase or the rest of the TV sell-through sort of based on London games catalogs and demands isn’t going to be there or do you think it’s more a combination of both? And the reason that I’m asking is I’m wondering at what point customers can become comfortable enough, because you’re not really going to see that sell through until the September timeframe to start put placing those orders with the high utilization. Then I have a follow-up on OLED.

Unidentified Company Representative

Well I think you can sort of understand it. We have come to this point where suddenly we’re talking about very high utilization rates very quickly. It seems like only a few months ago we were talking that it was only 50 or 60%. And so it has come very quickly, and it has come as much as anything from backlighting and backlighting coming – it’s almost chicken and the egg such as being the reduction in the price of LEDs. It’s created opportunities for these direct backlight devices. So how long it last? I guess there is a little bit of nervousness on that part.

I think what would give confidence to the whole industry, if we did start to see more products particularly on the lighting side begin to emerge, I’d personally think, if you look at some of the major players, there is a lot of positioning going on that tells you that people are getting ready for it. But there I think is also a question in markets like Taiwan do I invest in Taiwan or do I put more into China. And there’s a number of quite difficult decisions I think a number of the customers have to make. But they’ve taken the first important steps as far as we’re concerned and that is to check out with us what would be the lead time what would be the price. I can sort of understand. It’s not obvious. But there is certainly more interest in taking the next step.

Jed Dorsheimer – Canaccord Adams

Fair enough. Then maybe just on the OLED side. And I mean, glad to see you moving into the organic semiconductors as it creates a decent TAM for you. On OLEDs in particular are all of your tools based on the OVPD technology or are you doing any one-offs for and what I’m getting out is, is most of the production out there isn’t based on OVP, its based on FMS or LED or different technologies. So I’m wondering are you moving that strategy to capture that opportunity or sticking with the OVP? Thanks

Unidentified Company Representative

Well, let’s just try and capture it. I mean the vast majority is VTE today. And there are other technologies that are being developed upon them sort of the printing process. But what we brought to the party is OVPD is almost a variation on MOCVD. It’s an extension of it.

And I think what we would we’ve always believe that we must stick to your core competence. And we believe as the material structures and the chemistry employed gets more complex, the advantages that we can offer not just in terms of control, but also some of the other benefits in terms of throughput and cost of ownership we think we have a very strong compelling case, but as in all things it’s a question of now qualifying that and proving it, and moving forward.

So it’s not a new sector for us. I mean we’ve been working on this area probably for close to 10 years. But it is only really in the last sort of four or five years where we’ve seen some real concerted investment by some big guys. So of course we’ve seen at CES these very, very impressive sort of LG and Samsung OLED TVs. But they’re relatively early positioning products, quite expensive whether or not this will go high volume main stream in less than two to three years.

I think we can all discuss, but it isn’t just a question of displays. Although that there is a lot of where the interest is coming to us from, there are a number of people looking at clearly OLED lighting applications, and other organic semiconductor application. So, our strategy is not new, it does play to our strength that we’ve already developed in MOCVD technology, but it’s different scale, a very, very different scale. But one that we think it’s important that we get engaged in, because it can both add to the total massive market we can address on top of LEDs and it can also, long-term, even threaten it. So, it’s very important that we get positioned there to be able to maximize it. It’s a very interesting market dip, still relatively early days, but very interesting potential, we think.

Jed Dorsheimer – Canaccord Adams

Thanks, guys. I appreciate it.

Operator

The last question comes from Ed Mok from Needham & Company

Edwin Mok – Needham & Company

Hi, thanks for taking my question. So first one I have is, Paul, highlight that you have confidence about your product portfolio and your development, you know, product development cycle. Just wondering, do you think your current products is enough to drive the replacement cycle already on the LED space or do you see more development for you to kind of get to potential replacement cycle for your customer.

Paul Hyland

Well, I believe there is plenty of scope left in this current generation of product, but the R&D we are doing is not only for further developments of this platform, but also moving on to the next platforms, because when we – that’s where a lot of this investment that we are making now is going, because when we start to get into the much higher volumes and certainly higher performing a lot of cost of ownership lighting applications, that is going to require a different level of technology I think to sustain this industry going forward, 2020 and beyond.

So we are doing that work, I mean, that’s what we have been doing for last two or three years on particular product areas, but it’s been accelerated as you can just see in the numbers. We are spending more in people, we are spending more in hardware, we’re engaging more manufacturing and test results into preparing for the next generation. You’ve got to keep it moving forward.

Edwin Mok – Needham & Company

I see, great. That was helpful and then, just curious in terms of competition beyond Veeco, have you started to see (inaudible) local competitor in, China, Korea, or Taiwan or maybe some of the (inaudible) market?

Paul Hyland

Well, I think there’s a long history of involvement and interest from companies like Applied, who are very, very capable technology companies. We know also of a fairly long history of developmental companies like Jusung, is a company, a Korean company that’s been trying to qualify technology for a few years now, and indeed there are subsidies available and little companies springing up in China, because there are subsidies available for people trying to start industries. We know of – but we shouldn’t be arrogant about it, I mean, the reason that we continue to make investment, I don’t think it’s – know how, it’s technology know-how and expertise will keep you at the front in the race and hence, the reason we’re spending the money, but I don’t – we haven’t seen anyone yet, who is offering a consistent challenge to the current incumbent, but that’s not to say it won’t happen in the future.

I mean, that’s why you’ve got to keep driving the R&D.

Wolfgang Breme

(Inaudible) when I travelled to China and then talked to officials, you’ll find hardly some (inaudible) you find hardly somebody who believes that in China and with (inaudible) equipment can be built without incubation from international players. It’s hardly possible, currently and from the, as I understand it from the governments perspective that it’s sort of – it’s not in target, because if you take the market, it’s not – it doesn’t offer big employment opportunities and the side effect (inaudible) China’s doing is employment and it’s not really interesting to get it. The other side of course is an attractive market going forward, but I believe that the current players are strong enough to serve this market.

Edwin Mok – Needham & Company

Great, thanks.

Wolfgang Breme

Thanks, Edwin.

Paul Hyland

Thank you all. We will now close this Q&A session for this call. If you haven’t had the chance to ask the question then please feel free to give us a call or drop us an (inaudible).

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Aixtron's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts