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

Start Time: 09:02

End Time: 10:08

AIXTRON SE (NASDAQ:AIXG)

Q3 2012 Earnings Call

October 25, 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

David T. Mulholland – UBS Ltd. (Broker)

Andrew Huang – Sterne, Agee & Leach, Inc.

Sandeep Deshpande – JPMorgan

Janardan Menon – Liberum Capital Limited

Uwe Schupp – Deutsche Bank

Olga Levinson – Barclays Capital

Christian Rath – HSBC

Jed Dorsheimer – Canaccord Genuity, Inc.

Aaron Chew – Maxim Group Securities

Bill Ong – B. Riley & Co.

Malte Schaumann – Warburg Research

Anne Margaret Crow – Edison Investment Research

Operator

Good afternoon, ladies and gentlemen, and welcome to AIXTRON’s First Nine Months 2012 results conference call. Today’s call is being recorded and I would now like to hand you over to Mr. Guido Pickert, Director of Investor Relations at AIXTRON, for opening remarks and introductions.

Guido Pickert

Thank you, Operator. I would like to welcome everyone to the nine months 2012 conference call of AIXTRON SE. Thank you for attending today’s call. My name is Guido Pickert, Director of Investor Relations at AIXTRON SE. As usual, we have Paul Hyland, President and Chief Executive Officer of AIXTRON, as well as Wolfgang Breme, Executive Vice President and Chief Financial Officer of AIXTRON, with us on the call today.

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

As with previous results conference calls, I trust that all participants have our results presentation slides, page two of which contains the usual Safe Harbor statement. I will therefore not read it out loud, but would like to point out that it applies throughout this conference call. You may also wish to have our Q3 report at hand which was published yesterday as well as our latest IR presentation, which includes additional information on markets and its technologies. Both are available on our website.

This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of this recording or a transcript on our website at some point after the call.

I would now like to hand you over to Paul Hyland, AIXTRON’s President and CEO for opening remarks. 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 also like to welcome you on behalf of AIXTRON’s Executive Board, to the presentation of our Q3 2012 results. Let me start by turning to slide three and making some general comments about recent market developments.

During our Q2 call on July 26, we shared with you then, our expectation that the second half of 2012 would be better than the first half. We also expressed, during that call, our concerns about the increased short-term macro-economic risks and how they could impact the timing of orders and shipments in the second half of the year.

The disappointing news that I have to report today is that the pick up in order intake during Q3 has not been as strong as we expected and, consequently, it’s now clear that we will not return to profitability during 2012. This is obviously an unfortunate development, nevertheless our business environment appears to be stabilizing and current quotation levels indicate that in Q4 we should see a continuation of the recovery in orders and revenues we saw during Q3.

The good news to be drawn from this is that we believe that we have passed the trough point in the current order cycle, which is reflected in that orders and shipments are both picking up, albeit modestly at this point in time. We continue to be optimistic about the development and growth potential of our largest market for MOCVD equipment, namely; the LED market.

We remain particularly positive about the growing adoption of LEDs in general lighting, especially given recent price falls, which are making LEDs, for general lighting purposes, increasingly competitive. During Q3, for instance, we saw the first sub €10, 60 watt equivalent LED light bulb being offered for sale by a major European supermarket retailer. We anticipate significantly greater demand at these price levels given the longevity and low maintenance of these products compared to conventional lighting.

Incidentally; the retailer concerned was sold out of these lamps within the first few hours of going on sale, so consumers evidently have a healthy appetite for LED lighting at these price levels. As a knock on effect, the growing use of LEDs in general lighting, will inevitably necessitate LED manufacturers needing to increase their MOCVD capacity and to install new systems to satisfy volume demand and to reduce their manufacturing unit costs to maintain their price competitiveness.

That said, despite today’s very high utilization rates, our principal customers remain hesitant about adding new capacity. This is perhaps an understandable customer reaction, given the recent LED pricing decline and consequent margin pressures they are suffering from, as well as their concerns regarding the sustainability of this current strong demand coming from LED backlighting for LCD TVs.

But in our view, it is only a question of time before new capacity has to be added, but today; the exact timing of a pickup in MOCVD equipment demand remains difficult to forecast with any real precision from the current environment.

Let me now talk more specifically about Q3. Encouragingly, revenues were up by 35% sequentially to €62.2 million and order intake increased by 15% to €34.5 million in this quarter. However, operating losses increased from €16.5 million in Q2 to €78.3 million in the last quarter, largely due to a one-off inventory write-down of €51.5 million, which Wolfgang will explain in greater later detail.

We also continue to gain traction in our non-LED business. Non-LED MOCVD Compound Semiconductor equipment enquiries for power applications have continued to grow, reflecting the increasing interest, principally from the Power Electronics customers focused on the buoyant mobile market. Whilst not yet significant in volume terms, it does offer the prospect of more diversity from another MOCVD end market opportunity.

Within the Silicon Semiconductor market, our new QXP-8300 ALD system, which offers a compelling and cost effective technology solution for memory device producers, is being very well received by customers and we are feeling much more positive about this side of our business.

There is nothing new in Q3 that we can report from the Organic Semiconductor or OLED side of our business, other than to say that we continue to commission and qualify the production scale system we recently shipped to an Asian manufacturer and that the process will continue into 2013. In this area, we have other customer system orders we are working on, in addition to a considerable amount of R&D work aimed at positioning AIXTRON in what will be an exceptionally interesting market in the years to come.

At this point, let me now hand you over to Wolfgang for a more detailed overview of the first nine months of the year numbers. Wolfgang?

Wolfgang Breme

Thank you, Paul. Let me start with slide four and our income statement. The net result for the first nine months of the year was down year-on-year to a loss of €102.2 million. This reflects the already mentioned down cycle in LED equipment as well as the one-off write-downs which I will come back to later.

On a quarterly basis, the third quarter net loss was €78.3 million or €0.77 per share compared to €11.6 million or €0.12 per share in the previous quarter. This sequential increase in the quarterly loss can be explained largely by the reduction in gross margin which turned minus for the quarter down from 32% in Q2, mainly due to an inventory write-down.

This follows an inventory effect caused by a larger order cancellation lower than previously expected recovery of orders in the second half of the year, triggering an end of quarter review of all inventory after which we decided to reduce the value of certain components and spare parts which we feel are not going to be needed in the future. This write-down totaled €51.5 million.

If the write-downs were excluded, the quarterly gross margins would have been at ca. 15% still lower than the previous quarter. The major reasons for this was a less favorable product mix, including less final customer acceptances in Q3 and softer pricing on legacy products. Besides that, the gross margin suffered again from the fixed cost effects related to manufacturing and service activities.

I believe it’s important to emphasize that AIXTRON is still engaged in optimizing its cost structure. For the first nine months of the year, general and administration expenses have decreased year-on-year by 41% from €24.9 million to €14.7 million principally due to a reduced number of temporary staff, lower consultancy costs, and lower IT infrastructure costs, as well as less profit related expenses. Selling expenses have also fallen year-on-year by 8%.

In Q3 2012, general and administrative costs were down by another 24% compared to the previous of the quarter amounting to €3.9 million. This sequential decrease was mainly due to the impact of our ongoing cost optimization measures.

In the coming quarters, while continuing our efforts to improve our cost structure but we will not do so, is lose focus on future markets and opportunities. Our increased focus on R&D is a key part of this strategy and over the first nine months of 2012, we have increased R&D expenditure by 45%, year-on-year to €51.8 million.

Let me now comment on the development of other operating income and expenses. Net other operating income and expenses, which primarily related to currency effects and R&D grants, resulted in an expense of €4.4 million for the first nine months of 2012, which is similar to the same period last year’s €4.2 million.

The overall result is that operating income from the first nine months came in at €-113.0 million as compared to €131.3 million profit for the first nine months of last year. This development again is largely attributed to the fall in gross profit, coupled with the increased absolute operating cost base due to the higher investments into R&D for future products.

On a quarterly basis, the operating loss increased from €16.5 million from Q2 to €78.3 million in Q3. The net financial result for the first three quarters of this year was €2.0 million compared to €1.5 million last year leading to a pre-tax loss of €57.5 million, compared to a pre-tax profit of €131.3 million in the first nine months of 2012.

Turning to our consolidated statement of financial position on slide five, you see that despite the inventory write-downs, our balance sheet remains solid with 33% of assets in cash and cash equivalents, a ratio of 83% equity and no financial debt. Cash and cash equivalents at the end of the third quarter stood at €209 million and were down from 11% from €235 million on the previous quarter.

This is mainly due to the continuing operating losses in the business. In Q3, €23.8 million in cash was used for operating activities, which is lower than the €25.1 million used in Q2 reflecting our increased focus on working capital and expenses control.

Of the €209 million in cash and cash equivalents at the end of the quarter, some €105 million were invested into other financial assets, which is cash on deposits with a maturity of more than 90 days. The most notable element on the balance sheet is the level of inventories including raw materials, work in process and finished goods, which at the end of the quarter totaled €157 million. This is 27% lower than the previous quarter, which reflects the inventory write-down as well as our ongoing focus on improving our cash generation from these assets. Please also note that although there is a price pressure on the market, we currently do not see any further need for inventory write-downs.

In comparison with Q2, advance payments from customers decreased slightly by €7.3 million to €61.2 million as of September 30. Trade receivables increased from €30.6 million to an end of Q3 €36.9 million reflecting the slight pickup in business volume in the last quarter.

I will skip the slide on our cash flows, as I already mentioned most of my commentary already. Therefore, let’s now turn to slide seven. Slide seven gives usual overview of revenues, equipment orders and backlog over the last 24 months. The most significant factor impacting the development of revenues and orders over the last year has been the current cyclical downturn in demand for MOCVD deposition equipment for LED applications. Revenues for the first nine months of 2012 are at €150.3 million and down 68% on the same period last year, where we stood at €470.8 million.

The good news, Paul just mentioned, is that both orders and revenues have picked up slightly. Our order intake in Q3 at €34.5 million was the highest in four quarters, revenues for the third quarter at €62.2 million were up 35% on the previous quarter.

Please also note that for comparison purposes, 2012 orders were valued according to internal policy at their current 2012 budget rate of $1.40 to the €12, whereas Q3 revenues were valued at the actual average booking rate of €1.29 per U.S.dollar.

During the first nine months of 2012, AIXTRON generated 74% of revenues, namely €110 million from equipment sales with the remaining 26% coming from the sales of spare parts and services.

The bulk of AIXTRON’s revenues come from equipment sales into the LED equipment market, but we have seen strong sales of spare parts and services revenues in recent quarters, as well as strong growth in equipment revenues from non-LED areas such as power electronics or Silicon Semiconductor equipment.

On a regional basis, 79% of total revenues in the first nine months of 2012 were generated by sales to customers in Asia, around 10 percentage points lower than in the same period last year. Europe accounted for 9% of sales with remaining 12% in the United States.

In summary, we remain well positioned with a strong balance sheet and a business model that allows us to steadily increase profitability as growing demand for LED equipment gains further momentum. In the meantime, we will continue to optimize ou8r operating costs.

With that, let me pass you back to Paul for some closing remarks. Paul?

Paul Hyland

Thank you, Wolfgang. Let me move on to slide eight and talk more about the near-term outlook for AIXTRON. As I said earlier, we are seeing a slight pick up in demand for equipment from LED manufacturers, but the fact that customers remain hesitant to commit to more substantial MOCVD investments, means that that pick up I spoke of, is not strong enough to enable us to achieve profitability in the current year.

As Wolfgang has already explained, in these circumstances, where we cannot yet accurately predict the LED General Lighting inflection point, we have decided to take the prudent action of writing off inventory that, after consideration, we have adjudged to be in excess to the current subdued level of market demand.

We shouldn’t forget that the semiconductor equipment business in general, is notorious for its ‘feast and famine’ cyclical characteristics. But what is new for Compound Semiconductors is that it has been further exaggerated by the unprecedented level of government subsidies seen in recent years, which fueled non-market driven LED equipment demand.

We are getting clearly closer to the beginning of the third and biggest major LED

investment cycle, namely for LED general lighting. It is not a question of ‘if’ this substantial market arrives; it’s only a question of ‘when’. Despite the difficult macro-economic circumstances we are all contending with, we continue to draw cautious optimism from the frequent evidence of increasing adoption momentum towards LED lighting.

We believe that the momentum signals continue to be positive. One of the world’s leading lighting companies Philips, reported Q3 numbers earlier this week and they reported that LED sales were up over 50% on the same quarter last year and that now, nearly a quarter of all their Lighting portfolio are LED lights.

In addition, China and Europe have both made significant steps over the last months in their encouragement of the development of next-generation lighting with their phasing-out program for incandescent light bulbs. From October 1, China has banned the use of 100-Watt and above light bulbs with the ambition to achieve 100% penetration of LED lighting by 2020.

In Europe, from September 1, the purchase and production of standard incandescent bulbs has now been completely banned. In the US, where there are additional utility company rebates available to consumers, it’s already possible to buy a 60-Watt equivalent LED light bulb for $15 from Amazon.com and the market there continues to show a healthy growth.

And although there is clearly considerable scope for capacity consolidation amongst our customers, our view is that the wholesale adoption of LED lighting will translate into an incremental need for somewhere between 2,500 and 3,500 systems over the next 5 to 6 years.

Whatever your view is on the timing, this is still a substantial growth opportunity for AIXTRON and we are confident that we are well positioned for this next up market cycle with our R&D investments, technology track record, strong local footprint and solid customer relationships.

We would be foolish not to acknowledge the increase in short-term macroeconomic risks in the end markets we address, or that the current uncertainty have increased the timing risks for orders and shipments. But we believe the worst is behind us and orders will continue to pick up going into 2013 and that we should return to profitability next year.

But for 2012, as you can see on slide nine, we expect to report a full year EBIT loss of circa €125 million on revenues of circa €220 million for the year. Let me just zoom up for a minute, to the bigger picture and remind you of our broader long-term ambitions.

The three semiconductor end markets that we are addressing are: Compound, Silicon and Organic. In Compound; in addition to a substantial amount of work being done for next-generation products, we continue to make good progress in developing MOCVD solutions for non-LED markets, generating more potential diversity in end market revenues. The power electronics market is one such market with a projected equipment TAM of approximately $1 billion over the next 10 years.

In Silicon; we are in the final stages of commissioning and qualification of the first production order installation in Korea for our QXP ALD system and are feeling more confident that we can build on this with more production orders next year.

For Organic applications; we launched the new PRODOS-200 PVPD R&D platform in August and we announced the delivery of a Gen 3.5 PRODOS production system to a major Asian customer where we are still in the installation and commissioning process.

But for our major market today, MOCVD for LEDs, although we cannot see a clear inflection point in LED manufacturers’ investment confidence, we see enough end market product positioning and pricing promotion to persuade us that we should see a continuation of order recovery during the next twelve months.

We see 2013 being stronger from a revenue point of view and that AIXTRON will become profitable again in 2013. To achieve that, we are going to increase our efforts into regaining the margin flexibility that we had during the prior down periods in market demand, in 2008 and 2009, and balance that against our determination to pursue those R&D projects that we believe provide substantial growth opportunities for AIXTRON in the coming years.

Finally, we remain firmly committed to our markets and our market strategy and focused on the long-term growth prospects for our business. With more than 30 years of experience in delivering cutting-edge production technology solutions to markets with great growth potential, we are confident that we have the expertise and focus to deliver substantial shareholder value in the years to come. I thank you for your attention.

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

Guido Pickert

Thank you, 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 maximum of two each time, this will hopefully allow everyone to ask the question. Your cooperation on this is much appreciated.

I will now pass you back to the operator. Operator?

Question-and-Answer Session

Operator

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

David T. Mulholland – UBS Ltd. (Broker)

Hi, thanks for taking the question. And just firstly and I have a quick follow-up. You mentioned that you’ve been doing some pricing down of older generation tools. I just wondered if you could give us some views on your level of confidence in getting prices backup and hence getting gross margins backup of 40% as we move into next year?

Wolfgang Breme

Hi, David, it’s Wolfgang. In fact, July wasn’t very good, I believe you asked the question first of all that we have some price pressure on our current systems. And second, what do we expect our gross margins to be going forward with the next-generation products. As I said in my commentary to the numbers, we of course are willing to accept lower pricing in light of our current inventory situation, whereas we believe that some of those systems and components we have on stock maybe not sellable, which is why we have taken the decision to write them down in this quarter.

Nevertheless, it’s our firm understanding that with the introduction of next-generation products in the future we will return to prices, which will have a margin like used to have in the past. This follows through logic, first of all, I believe everybody understands that we are in a situation to clear our inventory. Currently, we are using that as an argument in the market to convince some customers who maybe in a position to pull their investment decisions forward if the pricing is effective.

And second, we are targeting not only better cost of ownership with our next-generation of products, but also lower production cost for us as we design new system platform. And this makes us firmly believe that next-generation products will return to the profitability we have seen until the downturn started more than a year ago.

David T. Mulholland – UBS Ltd. (Broker)

That’s great. Just in terms of a follow-up, I just wondered if you could help us to understand the cost of goods just in terms of how much of your cost of goods is fixed cost and what we should expect in terms of the OpEx going into 2013?

Christopher C. Dodson

This is David, Chris, which is not easy to answer, and if the capacities are fully utilized, we have a ratio 80% to 20% fixed costs in our cost of goods sold currently of course and this may also go on for the next quarters, the utilization is quite low. This is not only, because we have enough work, but this is also due to the fact that we are shipping systems which already have capitalized production costs booked into inventory.

So even if our staff is working on reconfiguring systems which we have on stock for other customers, we will not see an effect of allocation production cost into inventory. So this is why we have an artificial under recovery of our production costs going forward in the next quarter. But in an ideal world, our ratio of 80% to 20% the relevant fixed costs in our fixed cost of goods has not changed. But as I mentioned, we are working on reducing our cost base and of course this is also targeted on the cost base if our fixed cost of production are concerned.

Paul Hyland

Now see, just to underline that. I mean, currently the production overhead recovery clearly is a lot more efficient when we have larger volumes and less variance in products. In the current environment, of course we are doing quite a lot of work in both the reconfiguration of existing systems.

There is certainly a border range of product variance going through, because the business we have is coming from a different wider range of customers. And as Wolfgang said with so much reconfiguration work and it doesn’t actually help obviously the production overhead recovery environment. But I think as the market picks up and we look for other ways to reduce the internal operating cost then we can expect, so they go back to, so if previous levels we’ve seen before, nothing’s radically changed.

We see opportunities to further reduced cost. And I think we must also accept this is a formal competitive environment with more demanding customers. I think as the industry grows and the customers who’re serving become bigger and more demanding and clearly this will be all parties concerned a more competitive environment on margin.

David T. Mulholland – UBS Ltd. (Broker)

And then just what do you expect on tax into 2013?

Wolfgang Breme

David, we are operating OpEx of approximately €110 million to €120 million currently. So I would expect to see this also in the next year maybe even we are able to lower those costs.

David T. Mulholland – UBS Ltd. (Broker)

That’s, great. Thanks very much.

Operator

The next question comes from Andrew Huang from Sterne, Agee. May we have your question please?

Andrew Huang – Sterne, Agee & Leach, Inc.

Thank you. I guess the first question is, do you maybe comment on the order outlook for Q4 and then some general comments for 2013?

Paul Hyland

I can’t give you any detail, other than really that what we said in the call, Andrew. I would say that certainly Q3 has represented a pickup from what we’ve seen previously. We believe that probably does indicate the trough. We still have client good quotation activities. But I think it’s fair to say and we wouldn’t have taken action we have if we didn’t believe this. But clearly what we thought we would say in the second half is more muted. I think we will continue to see some form continuation of recovery in Q4. And 2013, I’m fairly sure will be affect the year than we’ve seen this year clearly will be. It’s a question of timing and of the angle of recovery. We don’t know what that is yet. But I think there is slightly more optimistic outlook than we’ve seen for the first half of the year.

Andrew Huang – Sterne Agee

Okay. And then when I think about the QXP-8300, and silicon business for next year. How much could that actually contribute?

Wolfgang Breme

We haven’t given any guidance for next year. But certainly so far, if you like we can really characterize our optimism here, is that we have now installed in production facilities in a primary DRAM manufacturing career both installation and commissioning qualification of this new platform. So that’s alone gives us encouragement to believe that not only with that customer, but with other similar customers, we can expect to see more potential.

That said of course, the memory market is also very closely linked to the effects that we are seeing into the macroeconomics demand. And there are some areas, memory being one, where we are seeing some positive developments on a higher level. So I hope we will continue to see the success we’ve had in 2012 continuing to 2013. But I can’t put a number on it here and now, Andrew, I’m afraid.

Andrew Huang – Sterne Agee

Okay. Thank you very much.

Paul Hyland

You’re welcome.

Operator

The next question comes from Sandeep Deshpande from JPMorgan. Please it’s your turn now.

Sandeep Deshpande – JPMorgan

Yeah. Hi, thanks for letting me on, a couple of questions, firstly again going to the growth margin. How would break the gross margin sequentially, even if you exclude the write-down, it has changed quite a lot. You talked about these multiple products being sold.

So are you saying that for the growth margin to go back to normalize level to say 35%, 40% or so. We’ll need you to have a more uniform revenue base or are you changing something in your manufacturing going forward to go back to a normalize gross margin. Relating to that of course is, I mean will see a normalized growth margin in fourth quarter?

And secondly, the question on the competitive environment I mean you’ve talked that inventory, which why there is some price pressure et cetera? Do you see a return to regular competitive environment, to say starting in 2013, because through 2012, you have lost some share, and can new products bring you back to market share or is it something else in the whole competitive environment, which will get you back to a more level better market share position?

Paul Hyland

Good afternoon, Sandeep. I mean if I can just start this and then I’ll let Wolfgang drill into a bit more detail on the margin. If we look at, you asked net of obviously the inventory write-off, certainly the gross margin effect that we saw in Q3 is some extra product mix.

So last final acceptances than we hoped, I think we are seeing a return to a slower rate of final acceptances than we’ve seen before. And customers are more reluctant to actually sign off this final system. And we’ve also seeing softer pricing on legacy products, and of course the under recovery effect is also in that gross margin area.

On EBIT level, obviously areas like increased warranty, where we are putting more effort into servicing and supporting specific customers. But in general terms, I think we’ve seen in the past and exceptionally high gross margins. I think we’ve even seen 50s in the past. I don’t think those days will come back. But I think certainly our belief is sort of 40% in the 40s range is something that we can expect to return to.

And on the competitive question you asked, because that we’ve been carrying some previously manufactured systems for other customers for quite some time. And when that situation first emerged, which it was a long time ago. We’re talking probably certainly well over a year. At that stage, our view of how the recovery would occur left us feeling reasonably comfortable. It was just a question of time before we matched up those systems with customers who simply needed reconfiguration work.

In the first half of this year, we believe we could see that recovery picking up in the second half of the year, although we are seeing recovery. We’re not seeing it open magnitude I think we expect it. So we’ve taken the view. We’ve balanced off the stock we have. What we think is the immediate need for it and taken the step that we decided. This is appropriate time to write that step down, and then tidy up the books.

Now going forward, we continue to do a lot of work as you would expect on next-generation R&D and system development. And I would expect, I see no reason why we would suddenly forget how to design very good MOCVD systems, when the market picks up and when the amount begins to reemerge for substantial volume, whether it would be for Showerhead products in those markets where vertical deposition is the preferred technology or for planetary technology, where those markets where they have other levels of expertise or particular application. We will have both products.

So our confidence in the technology hasn’t changed. And you can be sure when the market picks up. We will have the appropriate products available as and when they’re needed. And indeed if you look at our progressive investments in R&D, we’re certainly not backing of that. Wolfgang, do you want to add any other comments on that.

Wolfgang Breme

And to answer the question, I think Paul has mentioned most of the levers we are working on. And I believe we will have some certainty to get back to the margins we used to and I think we have to say that this is absolutely necessary also to finance the ambitions we have in the future for other product line. So here is the targets, is to go back to the margins we have seen up to the end, and not allowed title. So technically the answer is yes, we are going back to gross margins that we had year-ago.

Sandeep Deshpande – JPMorgan

Thank you, Wolfgang.

Wolfgang Breme

Okay.

Operator

The next question comes from Janardan Menon from Liberum Capital. May you have your question please?

Janardan Menon – Liberum Capital Limited

Hi, thanks for taking the question. My first question is actually on your statement that you should be breaking or making a profit in 2013. Just a clarification, is the break-even level still around €280 million? And also your backlog is down quite a bit, and unless you’re taking about €55 million or so of order in Q4, given your guidance of total revenue of €70 million. You probably will be down again in Q4.

So I’m just trying to match up that that low order level and lower backlog than you started off this year with the expectation that you could break-even or make a profit. So is it more sort of second half shop recovery that you’re expecting or is it a steady increase in orders that you will see, which you think will be enough to get you to those kind of revenue levels?

Second question is your selling expenses went up quite a bit in the quarter, and your explanation was increased provision for after sale services, if could you just explain that a bit more that will be helpful?

Wolfgang Breme

Let me start with the break-even point. It’s of course a little bit difficult just out of the clean air carving the break-even point out now, because of the summary of special influences we had in numbers in the last nine months. But in general terms, you mentioned the €280 million. We are targeting break-even level in the range of €280 million and €300 million revenues. And in 2013, it’s very concern. We of course have not given any guidance. But as Paul said we are not targeting the losses in the next year. So this means consequently that we expect an upturn in revenues as well.

To answer your question on the selling expenses, it’s correct. They are amounts and therefore first of all spending on warranty and good for the expenses for our customers in Asia, and also we have put in some provisions for after-sales activities in the upcoming months.

And this is basically two things. First of all, we have supported some customers with attractively priced spare parts and services. We’re not so experience. You can imagine that, especially in areas like China, customers need extensive support to get factories up and running.

And second, you may have seen in our report. We have shipped and installed the first new QXP systems in the silicon field and approximately one quarters of the revenues and last quarters were 25%, 26% for the silicon applications. And you can imagine that the installation of the first lot of those systems goes along with product adjustments and extensive after-sale service activities in customers’ facilities and also this contributed to the increase in selling expenses.

As I mentioned in my comments, we’ll grow the selling expenses as well as the administrative expenses, are on the downward trend. But the semi-expenses of course were up compared to previous quarters, because of the warranty and goodwill expense development.

Janardan Menon – Liberum Capital Limited

So that should be done somewhat in the Q4 and beyond?

Wolfgang Breme

Yes.

Janardan Menon – Liberum Capital Limited

Okay. Thank you.

Wolfgang Breme

You’re welcome.

Operator

The next question comes from Uwe Schupp of Deutsche Bank. Please it’s your turn now.

Uwe Schupp – Deutsche Bank

Yeah, thanks for taking the questions. Two questions please, firstly, again on the silicon revenue opportunity. May I rephrase, I know your question maybe a bit by asking whether the revenue opportunity could be about similar to what your subsidiary Genus that you had in revenue in I believe 2005, 2006 i.e. some $50 million were in a similar firm has been won, I believe will that same customer?

And then secondly, just under the G5 Plus system, it seems to be that’s largest platform in the market at six inch and 200 millimeters as well, 40% higher throughput than your competitor’s leading product. I mean how effective is it really for gallium nitride on silicon customer maybe also in power electronics and for the silicon players? Just maybe I would be interest in your comments on your sales activities here, thanks.

Paul Hyland

I think on the silicon, yes, you’re right. In terms of the revenue levels that we might expect to see and that’s about right I think of it, because I think although we were talking then about different films, and we were talking about CVD technology, CVD basically [touched] in terms of an equipment demand in about 2005, 2006, where they were able to extend those films into the later generations.

But the recent success has really been come about because the materials are now changing, and the need for this sort of QXP or ALD product has become more attractive to customers. So we expect once we’re back in, we should be able to look for a number of generations and different application. But I think for planning purposes, your assumption is reasonable at this stage.

And when it comes to the G5 Plus, I mean it is by far the largest number of aspects here. One is you’re absolutely right. It has two obvious benefits to the different markets, power electronics that’s the market where increasingly driven by sort of mobile applications, we’re seeing far more interest in that area. This product is very much optimized to that.

For gallium nitride on silicon for LED applications and we have a number of customers here already working with this platform or looking at this platform with that in mind. And amongst those of course our several customers already have, shall we say redundant eight inch or 200 millimeter infrastructure available. And then of course for those customers, the ability to be able to move to eight inch wafers is highly attractive. The product at the moment is certainly by far the biggest eight inch platform that’s available on the market and we are certain that we can offer by far the best uniformity.

So we have a product. It’s now question of how long the market takes to both adopt it and be able to qualify their processes. It may require a little bit of patience, but the response so far has been very good, and it very nicely to that same modular family, that same G5 platform families. So we’ve got the synergies and benefits of the G5 customers already are familiar with.

Uwe Schupp – Deutsche Bank

Okay, thank you.

Operator

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

Olga Levinson – Barclays Capital

Hi, thank you for taking my question.

Paul Hyland

Hi, good afternoon.

Wolfgang Breme

Good afternoon, Olga.

Olga Levinson – Barclays Capital

Good afternoon. The first question, just wanted to probe a little bit on the mix of your orders between LED power electronics and silicon in the September quarter, and also whether there was about €10 million to €13 million in backlog adjustment based on the backlog numbers that you reported?

Paul Hyland

Okay. I think actually the mix of end applications was pretty much similar in percentage terms as we saw in Q2. We still saw that in the range of 50%, 60% pure LED. And the other major area would be what we call display and others, which includes power electronics, as well as other similar applications. So we’re not seeing a dramatic change in the mix, and that remains the same, but probably 50%, 60% in just pure LED. I’m sorry Olga, your second question?

Olga Levinson – Barclays Capital

Just wanted to I guess doing the math it looks like it was about – yeah any sort of backlog adjustment?

Paul Hyland

Yeah, I mean I think that we did have a small backlog adjustment. I think what we’ve done if you think back to when we had a big change about 12 months ago, you know that we took a big adjustment to the order book. Then I think probably it was a true for our competitor. I think they’ve probably taken about €40 million over the last two quarters. I think both of those are very conscious of the need to make sure we maintain over the backlog in line with what the different risks are with final acceptance, et cetera, et cetera, but that was the small, I don’t know the exact figure. Wolfgang?

Wolfgang Breme

Was in the range of €20 million, €19 million or €20 million depending on the exchange rate, maybe the remark is what Paul mentioned before we are not talking about cancellation. Those are orders, which we have on the books that we answer if and when we can ship them otherwise it will fill all the criteria. So in a certain area the uncertainty is quite high that if customers are still able to take the system.

Olga Levinson – Barclays Capital

Got it. And then just a second question, embedded in your EBIT guidance for the December quarter, what should we assuming for the gross margin and the selling expense? I think you mentioned that selling expense that should be down modestly, but just wanted to think of how should we think about of it…?

Paul Hyland

I would expect selling expenses a little bit north of the Q2 numbers, and I think the same I would model in for the gross margin. So if you just take all the adjustments out, we would spend some cost of sales in the third quarter, then we may come back to the same level, which we had in Q2.

Olga Levinson – Barclays Capital

Got it. Thank you.

Paul Hyland

You’re welcome.

Operator

The next question comes from Christian Rath, HSBC. May you have your question please?

Christian Rath – HSBC

Hey, yes, good afternoon and thank you. Just of the mix you said 50% to 60% LED related, is that the same for order intake of the backlog and I mean what’s drove to increase in sales in Q3, which part of the dip in this? Thanks.

Paul Hyland

I’m just thinking sort of that. I think we probably saw in percentage terms. If we’re just comparing backlog to order intake, LED grew slightly, but it’s marginal. I mean I wouldn’t put a huge amount of weight behind and a shift in emphasis. I don’t think there’s a huge amount of difference.

I think it also back to the point, we’ve just made about try to maintenance of order book et cetera, et cetera. I’m pretty sure overly conscious that we need to keep the tied order book. So what you’re seeing basically that’s on the order book relates directly to real demand out there and order intake likewise. So I mean I think that’s in line with what everyone else is seeing.

Wolfgang Breme

And Christian, when it comes to the revenues, you see in our report that 26% of the revenues in Q3 were driven by the silicon. Revenue system, revenue recognition, they were not all delivered in the third quarter. But this is of course to major driver and that we will able to recognize revenues on our QXP systems, which that now we have final acceptances for the system. So the systems are now established in the market, which should make us very confident for the future.

Christian Rath – HSBC

Okay, thank you.

Operator

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

Jed Dorsheimer – Canaccord Genuity, Inc.

Sure. Two questions and thanks for taking them. First, I guess just digging into including written-off inventory. Just want to make sure, so given that these systems were customized for another customer and that you’ve felt that the timing versus the level of demand was a rationale for writing these off. I assume that you maybe able to still sell these on a go forward. So I just wanted to one, clarify that you will be breaking out any sales associated with the zero-cost inventory. And two, will these will these likely be sold as parts, or full systems and then I have a second question on the silicon?

Paul Hyland

Well, first of all it’s possible, of course, if we were surprised on an upside, that we had far more relevant orders came in then we think it’s prudent to expect at this stage and they can’t be used. But of course, the longer they go on, Jed, of course the more work you have to do in order to be able to reconfigure them and bring them up to a state to ship the customers. Obviously, there are components within these systems that, as they begin to drift towards their warranty date, we have to take them out and change them.

So you’ve got a rising cost the longer they are around. So we think our decision is prudent. You can’t go on forever imagining this is going to be a short-term opportunity to turn the stock. So we’ve taken the decision we have.

Jed Dorsheimer – Canaccord Genuity, Inc.

Yeah. I’m not questioning the decision, Paul. But in terms of getting ASP’s backup, do you see, I’m trying to figure out, do we have to get through sort of the inventory from an ASP pressure perspective, or is it just more demand related, that’s were the heart of my question was coming from?

Paul Hyland

I guess, the model is purely demand related.

Jed Dorsheimer – Canaccord Genuity, Inc.

Okay.

Paul Hyland

Simply, let’s say, I understand the background of your question, but I think it’s we have done a reasonably conservative approach for the future demand. And of course, to come back to one of the earlier questions, we have also to see product generation change in front of us. So this is why we have taken this approach. If the stuff is sellable, yes, of course it is sellable and it’s sort of all the write-offs in the third quarter were not all linked to work in progress, it was also linked to certain inventory.

So parts and inventory, which are of course still sellable. But currently, we do not do see more likely than not opportunity to sell the inventory we have written off, and this is why we have taken those steps.

Jed Dorsheimer – Canaccord Genuity, Inc.

And then I can’t follow-up, I think he was going to answer that you will be breaking that out, can you just clarify? And then on the silicon side of your business, do you think that, is this more of a technology purchase of this Korean memory customer and the reason I ask, because I am just trying to gain insight into whether or not silicon can grow in the face of CapEx cuts in that particular market, or whether or not you think you’ll need a CapEx cycle in order for this to be more widely adopted beyond just as one customer?

Paul Hyland

First of all, if I can just make sure I’m clear on your first question. Obviously, the way in which we record, I think your question, Jed, is that if at some later stage we sell these systems which are currently now valued at zero, is your question, how would we report it?

Jed Dorsheimer – Canaccord Genuity, Inc.

Yeah, or if you sell a part, let’s say, you have a platter that is part of a system that has been written off, so the cost of that inventory is zero. Will you be breaking that out going forward that of the sales, €10 million or €5 million were to zero cost inventory I assume that you will, but I just wanted to clarify that?

Wolfgang Breme

Yes, of course, Jed. If we would be very lucky and do this, I mean, this would have a significant impact on the gross margin, so definitely we would have to explain it, then.

Jed Dorsheimer – Canaccord Genuity, Inc.

Okay.

Paul Hyland

Yes, the answer to your second question is yes, it’s definitely a technology point. After the period of time where we had a healthy CVD business, we were developing this QXP ALD platform for probably getting on for three or four years and expecting that the technology node at which it would be needed would be earlier.

In fact, I think we’ve reconciled our self that it may not be needed until probably closer to sort of 22 nanometer, but it’s coming earlier partially because of the material challenges the customers are facing, and then it’s a very healthy sign for us. So yes, it is a technology point.

Jed Dorsheimer – Canaccord Genuity, Inc.

Great. Thank you.

Paul Hyland

You’re welcome.

Operator

The next question comes from Aaron Chew from Maxim Group. Please it’s your turn now.

Aaron Chew – Maxim Group Securities

Hi, good afternoon. Thanks so much for the question.

Paul Hyland

You’re welcome.

Aaron Chew – Maxim Group Securities

I’m wondering if you could just touch on a little bit more the foundation of your EBIT guidance, or at least target I should say for positive 2013 and the implied €280 million €300 million revenue base. Just curious to what extent this is based on your broader theoretical outlook for LED equipment spending versus actual discussions with customers, just given that order rates in the €30 million to €35 million rate for each of the last four quarters and your backlog down to €110 million. Just wondering how much confidence you can give us that you really see the order book supporting at €280 plus million revenue base 2013? Thanks.

Wolfgang Breme

We have not Chew, broken out the detail of our guidance for 2013 yet. Our comment is really based on the fact on the long-term view, I think there is a quite healthy and understandable debate to the exact timing as to when we see the Solid State lighting. And there is clearly some potential room here for the effects that will come from customer consolidation et cetera, but we still remain convinced if we can just look at what the end market activity is going on. But the arrival of Solid State lighting is on its way. I mean and I agree it’s not possible to say precisely when, but I still firmly believe, we are going to see a turning point for the adoption of LED lighting at some point during 2013.

I think an earlier question, which I don’t think we fully answered, was what we see like Q1 and Q2, I’m not a person expecting a big bang in Q1. I mean other wise, we would quite rightly question us on some of the issues, some of the decisions we’ve made on the inventory.

It’s not clear when during the year, but I do believe that 2013 will see the demand for systems, if only because at the sort of levels if customer are to sustain a profitable business selling devices at a level we think will create critical mass in lighting, they’re going to need more volume and they are going to need more competitive process.

And the equipment is by far the largest influence on the ability of customers to be able to produce large volume at competitive prices. So at a level of confidence, we haven’t detailed out 2013 we wouldn’t do that at this stage. But we remain confident that 2013 will represent an improved demand here for us.

Aaron Chew – Maxim Group Securities

Okay, it’s fair, and helpful. Just a quick follow-up and if I may on the inventory. Could you maybe breakout how your current inventory balances, maybe as of industry Q, how it breaks down by industry versus work in progress and raw materials?

Paul Hyland

Yeah, it’s approximately €100 million of work in progress, and the rest is parts.

Aaron Chew – Maxim Group Securities

Okay. Thanks, gentlemen.

Paul Hyland

Okay.

Operator

The next question comes from Bill Ong, B. Riley & Co. May we have your question please.

Bill Ong – B. Riley & Co.

Yes, good afternoon, gentlemen. Hello, everyone. What is your cash flow break-even and at €209 million, what do you think your cash levels would sort of bottom out in this cycle?

Paul Hyland

Hi, Bill, generally yes. Again of course, if we go forward with higher revenues and if we use some of our inventory should have a positive cash balance. Our cash break-even tends to be around €40 million to be €40 million lower than our break-even point on an expense base. But going forward of course, we are targeting to use a lot of inventory, so I expect to stop the cash drain during this quarter.

Bill Ong – B. Riley & Co.

Okay. Thank you very much.

Paul Hyland

You’re welcome.

Operator

The next question comes from Malte Schaumann, Warburg Research. Please it’s your turn now.

Malte Schaumann – Warburg Research

Yeah, good afternoon. The first question is regarding power electronics markets. What do you think the market will need a number of tools in the coming years? The second question is regarding larger wafers. How do you see your customers moving to larger wafer size like six inch, and especially for lighting, do you expect them to start with the two-inch, or they move to fall at six-inch right from the beginning?

Paul Hyland

I’m going to pick up that second person, because I think it might be more straightforward. We’ve already started to see the movement towards some two-inch to four-inch. Many of the new sort of we say, new larger arrivals in this market already started at four, and already looking at six. The obstacle at moment six-inch is little too expensive. I mean I think in terms of that order intake, we’re probably seeing something like 20% or so is the six-inch devices. But it’s really likely to kick in I think going forward in the next two or three years.

We have certainly the Tier 1 customers are more likely, you are more likely to find them on six-inch, we’re already looking at eight-inch, whereas some of the early adopters on two-inch looking at four-inch. But we are seeing an increasing number of customers. In fact, there are some customers that may even skip six-inch and look at the eight-inch option. I can think of the few examples where that may indeed be more attractive option.

On the high-power relative to the small numbers at the moment, probably somewhere in the region of 20 or so 20, 30 a year, but the demand probably start to kick in beyond 2014, 2015, we think could be quite making a very attractive market.

Malte Schaumann – Warburg Research

Okay. So it would be then about 100 or so on that region?

Paul Hyland

I think, further out, it’s a bit too far for me to give you a number. I think from an activity level, we are seeing a lot of people looking at on purely power electronic side. We are getting a lot more interest and what we are see driving that is the increased demand coming from mobile communication applications more than anything else.

Malte Schaumann – Warburg Research

Okay. Thank you.

Paul Hyland

You’re welcome.

Guido Pickert

I’m afraid, we have only have time for one more question, but we will try to get back to any of you who are still waiting in the queue to ask a question after we close the conference call. Please go ahead.

Operator

So the last question comes from Anne Margaret Crow, Edison Investment Research. May we have your question please.

Anne Margaret Crow – Edison Investment Research

Thank you for squeezing me in.

Paul Hyland

You’re welcome.

Anne Margaret Crow – Edison Investment Research

I have one question looking, all right, looking at, what do you think will encourage your customers who are debating whether to place orders or not. And clearly, they’re on high utilization levels. But what is stopping them from placing orders? Is it just concern about the economic environment, or they having problems with financing?

Paul Hyland

We saved the most complex question for last. It really depends, to some degree, where in the region you are on which area. Certainly, there are some markets maybe China would be one, where we might expect to see some consolidation, which could have an influence on the state of which the next investments start.

Certainly, in some cases, money or raising a capital is an issue for some. We should remember the three markets, the Asian markets are very different in characteristic. I mean, we have, China still has a very substantial influence from the degree of engagement by government or regional government, Korea tends to be a more corporate non-subsidy driven market. But still is very capable to be a meaningful player in the lighting market, and has the encouragement with government with some fairly aggressive Solid State lighting targets.

And Taiwan, of course, has always been very entrepreneurial and very dynamic market, who can respond very quickly should the opportunity arise. At the moment, it’s difficult to say, otherwise I think we’d have been more positive about this earlier. One senses is that we are just the positioning and the pricing activities going on. A lot of people now are beginning to prepare themselves for it, but there are number analysts who have made comments on the timing of it and I think they have a valid point. It’s difficult to say with absolute accuracy.

And as you’ve heard from this call, we tend to watch very closely, what evidence we see from the end market, which probably tells you more about some customers positioning rather than necessarily their manufacturing costs. But there are people already out there with selling devices at very low prices, maybe its market testing, but they’re certainly in appetite for LED lighting when we get around the sort of 10 year or $10 amount, but beyond that company precisely.

I mean we are watching it very carefully and when the opportunity arises, we will be ready to respond. But it’s difficult to say with absolute certainty. I think analysts from Phillips also, Phillips is certainly one of the best lighting companies in the world and they’ve steadily seen probably more on professional lighting, but nevertheless the LED revenue have been steadily growing as of many others.

Guido Pickert

Please go ahead.

Anne Margaret Crow - Edison Investment Research

Yeah. Thank you very much.

Wolfgang Breme

You’re welcome.

Paul Hyland

Thank you. At this point, we’ll have to wrap up the Aixtron Q3 2012 earnings call. Thanks for joining us and for your questions. If you have any additional questions then please don’t hesitate to contact with our IR team in U.S., or us here in Germany. Thanks for your interest and goodbye.

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 Q3 2012 Results - Earnings Conference Call Transcript
This Transcript
All Transcripts