Earnings call: AIXTRON hits 2023 expectations, eyes growth in power electronics

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Earnings call: AIXTRON hits 2023 expectations, eyes growth in power electronics
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AIXTRON (ticker: AIXA), a provider of deposition equipment to the semiconductor industry, has reported a strong finish to 2023, meeting its full-year guidance with significant growth, particularly in the fourth quarter. The company announced during its Full Year 2023 Results conference call that revenues grew by 36% year-over-year to €630 million, with a gross margin of 44% and an EBIT margin of 25%.

The successful launch of the G10 series for all material systems and a robust order intake of €641 million have positioned AIXTRON for continued growth in 2024, especially in silicon carbide (SiC) and gallium nitride (GaN) power electronics.

Key Takeaways

  • AIXTRON achieved a 36% increase in annual revenue to €630 million in 2023.
  • The company launched the G10 series, leading to strong growth in SiC and GaN power electronics.
  • Order intake for 2023 stood at €641 million, with a substantial order backlog of €354 million.
  • Q4 2023 revenues reached €214 million, despite a negative free cash flow of €110 million for the year.
  • AIXTRON plans to develop the G10 series further and start constructing the AIXTRON inno center in Q4 2023.
  • The company expects stable demand for GaN, a moderate slowdown in SiC capacity expansion, and growth in laser and microLED markets in 2024.
  • Full-year guidance for 2024 projects revenues between €630 million and €720 million, with a gross margin of 43% to 45% and an EBIT margin of 24% to 26%.

Company Outlook

  • AIXTRON anticipates further growth in 2024, driven by the G10 series in SiC and GaN power electronics.
  • The construction of the AIXTRON inno center is set to begin in Q4 2023, with CapEx expected to surge to €100-120 million in 2024.
  • The company has provided a revenue indication for the following quarter to enhance guidance transparency.

Bearish Highlights

  • A slowdown in silicon carbide capacity expansion is expected due to recent developments in the EV market.
  • The negative free cash flow of €110 million for 2023 is a concern, though the company is optimistic about achieving positive cash flow in the future.

Bullish Highlights

  • AIXTRON sees stable demand for gallium nitride, with existing customers expanding and new entrants in the market.
  • The company is confident in its ability to serve the market's needs, especially in a dual wafer scenario.

Misses

  • The company reported a negative free cash flow for 2023 but is targeting shorter lead times and inventory reductions as supply chains relax.

Q&A Highlights

  • Dr. Felix Grawert mentioned various technologies under evaluation for mass transfer in microLED production.
  • The company's market share in SiC is between 50% and 60%, positioning them as a clear leader in the market.
  • AIXTRON declined to comment on specific customers due to competitive dynamics but acknowledged only one push-out in orders.

AIXTRON's CEO, Dr. Felix Grawert, has expressed confidence in the company's growth trajectory, particularly in the power electronics segment. The company's strong performance in 2023 and its strategic focus on developing and expanding the G10 series for material systems such as SiC and GaN suggest a positive outlook for 2024. Despite a moderate slowdown in the SiC market, AIXTRON expects to continue its leadership in the industry and sees potential in the growing markets for lasers, microLEDs, and red LEDs. The company's commitment to transparency in revenue guidance and its plans for the AIXTRON inno center demonstrate a forward-looking approach to addressing both current and future market demands.

Full transcript - None (AIXXF) Q4 2023:

Operator: Good afternoon, ladies and gentlemen, and welcome to AIXTRON's Conference Call regarding Full Year 2023 Results. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. [Operator Instructions] Let me now turn the floor over to Carsten Werle.

Carsten Werle: Yes, thank you very much, Beatrice. Good afternoon from us and welcome to AIXTRON's full year 2023 result call. I'd like to particularly welcome our CEO, Dr. Felix Grawert, and our CFO, Dr. Christian Danninger, who will guide you through today's presentation and then take your questions. This call, as a housekeeping remark, is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcasted without permission. Your participation in this call implies your consent to this recording. Please take note of the disclaimer that you find on Page 2 of the presentation document as it applies toward the conference call. This call is not being immediately presented by webcast or any other medium; however, we intend to place the transcript on our website at some point shortly after the call. And with these introductory remarks, I would like to hand over now to our CEO for his opening remarks. Felix, the floor is yours.

Dr. Felix Grawert: Thank you, Carsten. Let me also welcome you all to our full year 2023 result presentation. I will start with an overview of the highlights of the year and then hand over to Christian for more details on our financial figure. Finally, I will give you an update on the development of our business and our guide. Let me start by giving you an overview of the highlight and key business development on the year on Slide 2. The most important messages of the day from my viewpoint are, in 2023, we have successfully continued our growth trajectory. We have delivered on our 2023 guidance and achieved a very strong fourth quarter results. We have successfully launched the G10 series for all material systems that we are addressing. We expect further growth for 2024, and strong further growth for 2025. The 2023 revenues have grown 36% year-over-year versus the already strong fiscal year 2022, and have reached €630 million. This results in a strong gross margin of 44%, and at the bottom line an EBIT margin at 25%. As indicated with our Q3 call in October, we have generated an outstanding Q4 2023 result. AIXTRON plays a decisive role in driving the dynamics of the market with the launch of the G10 product family. In just one year, we have renewed AIXTRON's entire product portfolio, starting with the introduction of our G10-SiC continued with the G10-AsP in April '23, and concluded with a G10-GaN in September '23. All members of the G10 family take the strong performance of the already very successful predecessor product to the next level. With its dual wafer size capability, the G10-SiC supports the transition of SiC power electronic to 200 millimeter wafer. The G10-SiC market entry was met with great response from our customers such that this product makes already about 30% of the full year revenue of '23. This has also demonstrated the capability of the AIXTRON's organization to scale new products into higher volumes very fast. Over the course of 2023, we were able to further improve the already strong performance and productivity of this system such that the G10-SiC now set standards in terms of performance, stability, productivity and unit cost. The G10-GaN on the other hand, has triggered a new era of high-volume production in the field of GaN power semiconductors. Not only that this system offers further improvement and performance, but above all it addresses the need of modern mass production. Increased productivity, reduced space consumption, longer maintenance intervals with reduced maintenance effort and a further reduction in production costs per wafer. Finally, the G10-AsP sets new standard in terms of stability and performance in the gallium arsenide material system. It is the first system to enable robust large-scale production of microLED and laser components. In doing so, we have remained true to our original market optoelectronics. This system has set standards, particularly in the areas of particle reduction, automation and wafer size. Multiple customers with innovative application have already chosen this system. In addition to the sales achieved, the awards received from Coherent (NYSE: COHR ), TI, TSMC and onsemi are proof cases of extra focus on customer orientation. We have grown from being a specialist into a reliable high-volume provider in the modern semiconductor industry. In recent years, we have steadily increased the Company's level of maturity in all areas, from quality to production to serve. At the same time, we have optimized our internal structures and processes to achieve scalability for further growth. I am very pleased that the era of SiC and GaN power electronics has been the strongest demand driver in '23, representing about 80% of our equipment order intake for the year. This strong development is a result of further capacity expansion activities of our customers, but also great strides we've made in improving the uniformity of our G10-SiC multi wafer system. Also, in Q4, the biggest demand drivers were our systems for SiC and GaN power electronics. In addition, demand for tools for optoelectronics and LED, including microLEDs have rebounded in the fourth quarter after weak first nine months. Demand for our equipment has remained very strong, resulting in an order intake of €641 million, up 9% year-on-year, driven by the strength of the growth of the end-markets our customers are serving. As a result of this, we can report a strong order backlog of €354 million, up 1% year-on-year. Completing this short highlights section, I would like to express a strong gratitude to the entire AIXTRON team that has made all these achievements possible in 2023. With this, I will now hand over to our CFO, Christian Danninger. He will take you through the full year '23 financials. Christian?

Dr. Christian Danninger: Thanks, Felix, and hello to everyone. Let me start with the financial highlights of our income statement on Slide 3. As Felix mentioned, revenues in 2023 were up 36% to €630 million, with 74% of equipment revenues coming from power, 12% from optoelectronics, 11% from LED and the 2% contribution from R&D tools. Gross profit was strongly increased by 43% year-over-year to €279 million. EBIT at €157 million, a 50% increase and net profit at €145 million was up 45% year-on-year. Q4 '23 revenues at €214 million even bet a very strong level of €183 million in the same quarter of last year. As Felix mentioned, orders in the quarter and the year continued to be strong and our backlog was slightly up, fueled by the mentioned trend in demand. In 2023, we've made great progress on profitability improvement with a 2 percentage points increase in our gross margin versus 2022, which came in at 44% and an EBIT margin at 25%. At the same time, we have decided to increase our invest into R&D in the year 2023, to a total of €88 million, driving OpEx to €122 million. In 2024, you will see another increase of R&D expenses by around a mid-single digit million euro number before in 2025, it will go back again to the level we have seen in 2023 or even below. This is driven by the effort to complete the G10 series and to start work on the next product generation in parallel. SG&A on the other side will remain flat in 2023. In 2023, we again utilize tax loss carryforwards and capitalize some additional deferred tax assets in the amount of €7 million due to the expected future profits. This reflects -- this reflected in an effective tax rate of 8%. For housekeeping, for modeling assumptions, we still recommend to apply the tax rate of around 15% in fiscal year 2024. Now to our balance sheet on Slide 4. We ended the year 2023 with a total cash balance including other financial assets of €182 million, which was below the €325 million last year. There are a number of factors driving this decrease. First, we've seen again an increase in receivables due to disproportionately strong sales contribution in the last quarter, especially in the last month. These receivables will be collected in the first month of the year. Then, we have seen the increased CapEx for the construction of the innovation center. Advance payments received from customers were flat year-over-year at €141 million. Down payments represented about 40% of order backlog. Inventory levels at the end of 2023, went up to €394 million compared to €224 million at the end of 2022. This is the result of our strategy to load the supply chain early enough to secure on-time delivery of our products despite tight supply chains. And this was very effective in the year '21 to '23 and has secured us numerous orders even in very competitive situations. Now that we see that global supply chains are relaxing, we are adjusting our strategy and reduce buffer stock. Based on this, we target a reduction of inventory levels throughout 2024. As a consequence of all of these sectors, free cash flow in 2023, was negative at -- €110 million negative compared to €8 million in 2022. And with that, let me hand you back over to Felix. Felix?

Dr. Felix Grawert: Thank you, Christian. Now let me give you an outlook to what we expect in 2024. First of all, we continue to work on our new series G10 product generation. We have successfully launched these products and we receive strong customer pool for these products. In silicon carbide power, the G10-SiC makes already the vast majority of our revenues in this material system. In gallium nitride, most of our existing customers have switched repeat orders to the G10-GaN. And in gallium arsenide, customers are testing and qualifying the G10-AsP. We can already today, few quarters after the launch, conclude that the G10 series is very successful and fully meets, even exceeds our expectations. Furthermore, our customers bring many ideas for further improvement or enhancement of these products to us, such that the development work on the G10 series continues in 2024. At the same time, we are starting the work on the next generation of products in parallel. This allows us to secure our strong market position in the near term and also lay the foundation for further growth in the mid and in the long term. To have enough space for all of this, we have decided on the construction of the AIXTRON inno center in our headquarter location in Herzogenrath. Construction work on this cleanroom facility has started in Q4 2023. And by now, large part of the outer shell of the cleanroom has been completed. The project is fully on track with respect to time and budget. Due to the effort going along with the construction of the inno center and also the technical equipment needed for its operation, we expect CapEx in 2024 to surge to around €100 million to €120 million. In the following year, we expect CapEx to return to the normal level of €30 million to €40 million that you have seen in the recent past. Now, let's turn to the most recent developments in our end markets. Demand in gallium nitride is stable in 2024, on a very high level. We see that existing customers continue their expansion plan and additional new customers are entering the market. In many power electronics applications, gallium nitride is substituting silicon as the material of choice and the growth is now carried from a very broad range of applications across many voltage classes from roughly 100 volt to a 650 volt with some customers even working on higher voltage classes, such as 1,200 volts. In contrast, the recent developments in the EV market have led to a moderate slowdown in silicon carbide capacity expansion. Customers continue to pursue the ramp and capacity build-out plan, but many have somewhat reduced the pace and speed of the build out. This leads to a moderate reduction in the number of silicon carbide units that we expect to ship in '24 compared to the previous year. At the same time, we continue to gain market share in silicon carbide with new customer wins in the last quarter again. In 2024, we expect the market for lasers and microLEDs to continue at a decent pace, both making reasonable contributions to our revenue. In microLEDs, some customers plan small to medium sized pilot line. While high volume production and real volume ramp still seems a bit further out. We all have read an announcement from one of the microLED player this morning. This announcement does not affect our plan for revenues for 2024 and 2025. Finally, in 2024, we expect red LEDs to kick back into the game and make pretty sizable contribution to our revenues. We expect this to have an impact on the gross margin in 2024, in a range between 1 and 2 percentage points due to the lower gross margin profile of this application. So overall, we expect that our strategy of serving various uncorrelated end markets with our systems will be successful again in 2024. Based on this, let me now present our full year guidance for 2024 on Slide 6. As a starting point, we have asked ourselves how we can modify our guidance practice to even better guide the capital markets throughout the year. Many thanks for the input from some of you who have nudged us to review our previous practice. Now what have we done? We have reviewed the guidance practice of other semiconductor equipment players, and based on that, we have decided to provide you with a revenue indication for the following quarter from today onwards. Why are we doing this? Our business follows some quarterly seasonal pattern. They can be big in timing effect between quarters depending on whether shipments are reflected in one quarter or the next. We therefore want to make it clearer and more predictable to you that our annual guidance will hold up even if the next quarter, for example, may show some volatility. On the other hand, we have decided to drop the guidance regarding order intake. No other company in our comparison of guidance practice is providing guidance regarding order intake, and we have seen that the timing effect related to receiving large orders and the arbitrary quarter end dates have led to surprises and sometimes confusion. As you are used to, we are continuing to guide the new financial year revenue typically in a range of 10% to 14% versus the guidance midpoint like we did in the last six years. Gross margin and EBIT margin will be in a 3% range. This stays unchanged compared to the previous year. Also to be clear, as we continue to grow, our bandwidth of guidance in absolute terms will grow. This year, we are at about 13% bandwidth related to mid to the midpoint fully in line with the ranges of the last six years. With this, we expect revenues to come in at a range of €630 million to €720 million At the high end, this would be 14% growth compared to 23%. We expect a 2024 gross margin of 43% to 45%, so somewhere around last year's level, and an EBIT margin between 24% and 26%. We expect the development to be driven by ongoing strong demand for power electronics and an additional volume from the remainder of our businesses. On Q1 '24, in line with the usual seasonal pattern, sales in the first quarter of the year will be a bit slower than the annual quarterly average. In Q1 '24, we therefore expect revenues between €100 million and €120 million. This is significantly above the previous year's level, and we're expecting a good start into the year. For completeness, we have kept our U.S. dollar, euro budget exchange rate at which we record U.S. dollar-denominated orders and backlogs at USD 1.15 per euro. This has just a minor effect on the orders and backlog at only less than 1/3 of those recorded in U.S. dollars. Finally, we would like to give you in this place also an indication towards 2025. In 2025, we expect a continuation of our growth trajectory with a further significant growth in revenues. We expect in '25, the next wave of silicon carbide power shipments and gallium nitride volume expansion to kick in. For now, we expect a stable demand in optoelectronics for 2025. This may, of course, change in case the microLED volume production gets started, which would add further momentum on top of what we have just discussed. With these exciting growth prospects, I will pass it back to Carsten.

Carsten Werle: Thank you very much, Felix. Thank you very much, Christian. Beatrice, I would like to hand it then over to you to start the Q&A.

Operator: [Operator Instructions] And first up is Olivia Honychurch from Jefferies.

Olivia Honychurch: First one is on microLED. You did mention, Felix, in your statement, the announcement we heard from AMS last night. You said there will -- there'll be no impact on 2024 and 2025. I'm just wondering if you could explain why that is. AMS hosted a call this morning where they said that they still have about €150 million worth of obligations to their microLED projects in fabs. I'm sure not all of that relates to AIXTRON's tools, but does that mean that you still had tools to ship to them and that, therefore, you're enforcing those obligations? Or is it that the majority of your tools had shipped as of the end of last year?

Dr. Felix Grawert: So please allow -- thank you very much for the question. So please allow us to secure customer confidentiality in this case. I think this is always how we behave with our customers. So I cannot comment on the exact details. And on a higher level, what we have stated, we have planned for the year 2024 and 2025, a moderate amount of microLED revenue, as I have stated, with a decent number of tools going out, getting shipped. However, we clearly had the expectation or they had baked the expectation in the guidance we have provided and indication towards '25 that we have provided that there is no real volume ramp yet, only individual tools from individual customers, like building up the pilot line, doing R&D purposes, trying out different things. This continues in '24, '25. It's still a decent amount, quite some high double-digit millions of revenues, but it's not a volume ramp. Volume ramp, clearly, being €100 million plus, €200 million plus, which will come on top by the moment microLED really kicks in.

Olivia Honychurch: Okay. That makes sense. Maybe just a follow-up on your 2024 guidance. The midpoint of your revenue range implies 7% growth in sales. Can you just talk about the puts and takes within that? I know you mentioned in your comments that silicon carbide may be down this year. But how may we expect GaN to perform alongside that? And I suppose, what could drive you to the higher end of your guidance range? Would it be the power or maybe more of the comeback in the opto or the LED business?

Dr. Felix Grawert: Thank you for the question. Yes. Let me shine some light on what we see and what we are expecting here. So with our order pipeline, we are shooting clearly for the upper end of the guidance, yes, that's very clear. And with this, we have baked in that there's a bit of a slowdown in the silicon carbide market. I think we all read the news about EV ramp, EV rollout. And we have been a bit precautious here, because we don't know how much, let's just say, customers ship their orders, yes, and how much of the pipeline will materialize. So there's a clear pipeline in place to get to the upper half of the guidance, yes, and this slowdown is a bit difficult for us to quantify. I think at this point, nobody exactly knows how it unfolds. I mentioned also we continue to have the customer design wins in silicon carbide. So that's adding to it, which is also we make -- why we make a pretty strong statement towards 2025. This is real backed by an Excel spreadsheet kind of. And on the other hand, we have seen towards the end of '23 that the situation around export licenses has been getting kind of back into normal. Nevertheless, we don't know whether this continues on an ongoing basis or whether there is any problems coming back. So the lower end of the guidance considers that there may be some disturbing effects from the market and from export licenses while a normal growth scenario points more towards the upper end of the guidance. Can I say it like that?

Olivia Honychurch: That's really helpful color. And maybe just one final one for me, if I may. So 2025, you talk about strong growth. I think you're worrying for 2024's growth. So can we assume that the level of growth in 2025 will be greater than what you're expecting for this year?

Dr. Felix Grawert: Definitely, yes. So let's not go in the semantics about strong and the declaration. But I mean, I'm thinking clearly about teens of percent or even more for the year '25.

Operator: Next up is Gustav Froberg from Berenberg.

Gustav Froberg: Just two from my side. Could you maybe give us a little bit more color on new customer wins in silicon carbide, whether or not they are large or small, the ones you are winning? And then as a follow-up, maybe to that, so 2.5 questions. It sounds like you're also seeing some competition maybe at one of your existing silicon carbide customers. Could you maybe update us on how you see dual and triple sourcing playing out on the silicon carbide side and whether or not you think this will occur at other customers? And then yes, just on gallium nitride. Could you give us a split for '24 as to how you think this will play out in terms of new and existing customers?

Dr. Felix Grawert: I hope I get all the questions. Let me get started. Otherwise, I need your help. So related to new customer wins, in the past quarter, in the Q4, we have been able, in fact, to win again a handful of new customers, quite a decent number of customers. Among those, both smaller customers, but also very large customers, I think I can put that here. I don't want to give details in this place. So it's been a very successful quarter for us in wins, which is also why I mentioned that. Now in terms of dual and triple sourcing, I think the silicon carbide market in the end will be so big, and our customers are planning such big ramps that a dual vendor strategy, we may see in many places. The customer has the individual philosophy about how to set up their supply chain better. But a dual supply chain in many cases can be the place. We, on the other hand, are not afraid of that scenario. Our tool is offering -- because we use the multi-wafer system, a very, very high productivity. And therefore, our assumption is that in case even though dual sourcing we will provide the majority of the tools in a dual wafer scenario. So we are not concerned for that one. And with respect to the gallium nitride, I need your help, what exactly the question was again.

Gustav Froberg: Yes. Just you talked about seeing sort of a stable/a little bit of growth for this year and then maybe into next year as well. Could you break this down into new customers and maybe new entrants into the market and existing customers ramping up and expanding their capacity?

Dr. Felix Grawert: Yes. Thank you. Okay. Now I get it. Yes. So we see both. We see that existing customers continue their volume ramp plans, some faster, some slower, there's really a vast mix, I would say. And at the same time, I mentioned that we see that gallium nitride is more and more getting broader in terms of applications addressed from the power drill, from the electric bicycle, battery-driven applications, solar plants, whatever you have it, low voltage, all the way to high voltage and in some cases, the highest voltage. And based on this very wide spread of applications, we see, again, new entrants coming into this market, companies who -- some of them who is very large as a company, now starting and taking on gallium nitride efforts. We have seen in the Q4 even companies entering the gallium nitride, large companies entering newly into gallium nitride at the first shot, right, with big orders, very big orders. So the gallium nitride trend we can see is really having a momentum, a strong momentum and a continuing momentum.

Operator: Next up is Michael Kuhn from Deutsche Bank (ETR: DBKGn ).

Michael Kuhn: Few from me as well. Maybe question by question, that could be easier. Firstly, on your sales guidance, as usual, in three elements and one element is sales from new orders, which is €190 million to €280 million. If I remember correctly, in the last call, you spoke about lead times currently of 9 to 12 months. Would that indicate that you expect strong order intake early in the year? Or is there another interpretation?

Dr. Felix Grawert: This is a very difficult question. You may apply more logic than we have when we made the guidance, if I'm very honest to you. Difficult to answer that on a very serious note. And maybe I'll add here. We are trying to give a little bit of detail here, but you need to keep in mind that new orders are really only one factor influencing the full year revenues. There's other factors as well. It's just too early in the year to tell you that in detail, and we will update you for the planning over the course of the year as soon as we have a better view.

Michael Kuhn: Okay. Understood. But let's say your statements on lead times are still the same or given that you spoke about export licenses coming in quicker again, we might think about six to nine months again, which was, I think, the case like two, three years ago.

Dr. Felix Grawert: And we are not saying yes. We are clearly targeting within a year's time frame to go to shorter times again. We currently have the paradox situation that we have a very high level of inventory. You've seen it in our numbers, but on the other hand, some suppliers are still in a bottleneck situation. So it really depends a tool type by tool type. So it's too difficult to put it as a general statement.

Michael Kuhn: All right. Understood. And as you just spoke about inventories, I think temporarily, you guided for lower inventories at the end of the year. Now they went up. Is that kind of a strategic inventory buildup, which would again point towards the expectation of short-term orders being placed? Or are there other reasons involved as well?

Dr. Felix Grawert: Yes, I think you know we have the strategy to really build a large amount of inventory because to keep the supply chain crisis, which is now clearly over. And with that, we are now changing the strategy towards -- we see the supply chains relaxing. We see shipment times from our suppliers coming back to normal, not with all suppliers, but with most of them. And toward the year '24, we clearly expect that trend to continue and then, also players to get to a normal. And with that, it's very clear we will now focus on reducing those inventories more back to levels that you have seen in the past. But as I mentioned, it depends really part by part, supplier by supplier. So I think by the mid of the year, we will be able to give you a much more detailed view on that one. Just as the trend has reversed, we now reversed our strategy and we now, together with our suppliers work what this new strategy means and we start step by step to implement that.

Michael Kuhn: Understood. One more on cash. Do you expect a positive free cash flow this year?

Dr. Christian Danninger: Yes. I mean there are several elements flowing in. But I mean -- and I will not be able to give you a definitive number, but of course, that direction is absolutely clear. I mean we're expecting to drive the inventories down and results will be positive. And then on the other side, we'll have the CapEx for the Innovation Center. But the overall CapEx should be clearly positive free cash flow. The number we will see.

Michael Kuhn: Perfect. And very last question, housekeeping because I did not get that point exactly during the call. On R&D expense, what was the statement there for '24 and '25 on phasing of those cost items?

Dr. Christian Danninger: Yes. It's good that we clarify this, very important. What we indicated is that we will see some additional R&D expenses in 2024, in the range of a mid-single digit million amount compared to 2023. And the reason for that is that we are having a parallel situation now where we are completely finalizing the G10 systems and in parallel starting to work on the next-generation platforms. But we are expecting this then to go down in the next year in 2025, to a level of 2023, or even below.

Michael Kuhn: Okay. So indeed down in absolute terms, not just --

Dr. Christian Danninger: In absolute terms. All in absolute terms.

Operator: And the next question comes from Martin Marandon from ODDO BHF.

Martin Marandon: My first question is on microLED. Could you maybe comment more broadly about what is your latest view on the microLED industry? And if you perceive this microLED project cancellation as related to one specific customer or is microLED adoption could be somewhat delayed from what you previously thought? And I have a quick follow-up.

Dr. Felix Grawert: Thank you for the question. The first part of your question, I understood was a broader view on the microLED. And we see that microLED is not ready yet for volume ramp, predominantly due to challenges of the industry with the transfer, so the microLED gets manufactured on a wafer with semiconductor processing technology with our equipment for the epi and other equipment to structure the wafer to make the microLED so that on the wafer, you have millions and millions of microLED. This is all working. This is mature. However, then we all know the microLED needs to get transferred from the wafer on to a new carrier substrate. And the transfer step, which has nothing to do with the initial semiconductor processing element, is still providing difficulties to the industry. And that is why when we provided the guidance, we have said we are expecting for 2024, and the indication towards 2025, and that is only from our side, for AIXTRON, the number of sales of tools for R&D purposes, we are discussing with some customers who want to build up a pilot line of a number of tools to test out pilot line operations and start to say to check the reliability, but we are expecting for the next two years due to this effect, not yet a volume ramp. Now at the same time, we really see that the entire industry, all the display makers are focusing on getting the microLED up and running. So we have seen new players entering the space, big display maker. Ae have seen the structures of partnerships and collaborations, I would say, getting tighter with some of the large players making moves such as taking equity investments into the epi providers or into the chip providers. And where you can see the investments that is going into this is getting large. And from that, you can derive that there is a decent amount of seriousness behind this in order to bring this in the end to a success. And I think an indicator for that, that the industry continues and is really focusing on getting at some point, I think we don't want to give any indication for timing. Therefore, we only have baked in R&D and pilot line revenues in our guidance. And I don't want to dare to forecast because the step is so far away from us that we simply don't know if we are honest. But we have seen that at the Mobile World Congress, Lenovo showed a transparent microLED -- so as notebooks AUO some stuff on the CES that was an automotive dashboard, so to say, super high-end cool thing. And we've seen Samsung (KS: 005930 ) reveal transparent screens at the CES in Las Vegas. So if you see those names behind it, it's really the big display guys. And I think they are not there to demonstrate that they have a great R&D team, but it's kind of to create appetite potentially also to talk to some customers, once this is mature. So we see that the industry, I would see, is getting a different stage. Maybe we are from the Gartner (NYSE: IT ) Hype Cycle out of the first boom, hurrah, there is a new thing and it comes tomorrow. Rather, well, it takes a little more time. It takes bigger effort, maybe takes more capital involved. But we really see that some of the big guys are behind it. And you can be assured that AIXTRON is in the value chain for all of these efforts. So probably with a short question, long answer.

Martin Marandon: That's very helpful. Maybe a quick follow-up on that. I think the fear of today and what was released yesterday, the press release is maybe that microLED doesn't work for smaller displays. And is it something which could happen, your views is credible, what microLED never enters smartwatch or smartphone markets?

Dr. Felix Grawert: So we have no specific insight into this customer. Also, I have no specific insight what the reasons and so on were, I have a market view, and I have my own opinion on this one, which I'm happy to share with you. And my personal and own opinion is or our company opinion is that we believe that for the smartwatch, the microLED is expected to be very suitable. Why? The number of pixels is a relatively small number, for example, if you compare it with a mobile phone, the smartwatch is a device, which is being carried all around in all day situation, so to say. So the benefit of the microLEDs, the very high brightness, the very low energy consumption probably has one of its sweetest spots in this application. While the display, the cost of the display for the smartwatch also in relation to the overall BOM of the device is relatively low. So the entry point, initially typically for consumer product right at the beginning is expensive. Then, everybody works on over the years of getting the cost down and at the end cheap and high volume, right? So to say, the sweet spot about high cost but high performance is really given in this application. That's in general our opinion about this application.

Martin Marandon: That's very helpful. And maybe a last one, if I may, on GaN. We see some GaN players like Navitas talking about price parity as again for smartphone chargers, but also others like Infineon (OTC: IFNNY ), [RSTM] talking about GaN being integrated into automotive starting 2025. So now talking about using GaN AI for servers as well. So I was just wondering what's your -- in your view, the most important drivers for GaN this year? And how do you see GaN adoption play out in the next couple of years with all of these applications?

Dr. Felix Grawert: I think the true answer is all of the above, which I mentioned about the broadening, which also gives us the confidence for the continued momentum. I would put it like this to shine a little more light on it. I think in the early phase when the gallium nitride was started in the first -- in the Phase Ia and Ib, gallium nitride was only used as a discrete device, meaning one transistor, that can switch either very fast or very powerful. Very fast that property was used in the smartphone charger or notebook charger to make it small and lightweight. We all remember how it went from the big heavy brick that we have to carry around to like the little lightweight thing that we all have now these days. That is the property of the fast switch. The other one for the discrete device is in the data center and the server, right, very high power hundreds and hundreds of servers, big energy being consumed and gallium nitride makes the energy consumption less, meaning it's greener and cleaner. So that was, I think, the Phase Ib. Now what you have indicated is gallium nitride has its second fundamental property. And the second fundamental property is that what you cannot do with silicon and high power, you can make out of gallium nitride integrated power devices. You can make GaN ICs, and such a gallium nitride integrated circuit can help you to combine a lot of functionality in a very small space, but not only for logic for the compute function but really for power and for switching. And I think the industry is just now getting on the train, what can you do all with these GaN ICs? And yes, that definitely one of the further growth drivers, while the other driver, I would call it the better transistor, the better power switch also gets their market share gain. This is all happening in parallel.

Operator: And the next questioner is Andrew Gardiner from Citi.

Andrew Gardiner: First of all, I appreciate the modifications you guys have made to the approach to guidance. I think that does help. One thing in particular I was interested in talking to you about was the fact that you've given us a forward year guidance, yes, maybe a bit vague, but you're at least giving us something on 2025, which I think is very helpful. When you're giving us that, is -- would you say it's more based on your view of the end markets and how things are going to transpire or do you feel like you're getting more feedback from your customers in terms of what their plans are, what tool requirements are, the type of capacity that they're going to add. And therefore, yes, you can clearly see a bit of a, let's say, digestion phase in silicon carbide this year. But they're giving you feedback that suggests, yes, there is indeed going to be there another phase coming next year. It's not just you trying to call the cycle, you're basing it on the customer feedback.

Dr. Felix Grawert: Andrew, you're spot on. In silicon carbide, it's -- so let's go market by market, right? But some of our market, it's a general statement based on end-market view. For example, gallium nitride what we just discussed, right? We see this broadening ongoing as just discussed, and we take it because there are so many players more on an end-market view. And in silicon carbide, as you have hinted and suggested in your question, it is literally concrete discussions with customers about certain ramp plans when certain fab construction projects are getting concluded. Remember, silicon carbide, the one topic is the ramp. The other topic is that many customers are doing -- going through new fab construction projects, and there's time lines to finish the fab and with very concrete discussion with quite a decent number of customers, hey, my fab finish has been in this ramp and then in this, I need this number of tools and the number is not just one or two, right? So there's especially for silicon carbide, a concrete pipeline, with concrete customers and concrete numbers behind my statement. And as said, just for the completeness across our market for the lasers and microLED market, we just have no growth baked in, in our assumption. It's just stable and flat. So there's no additional momentum baked in. And yes, then at some point, the microLED really comes, that goes on top of all these statements. That's not in yet.

Andrew Gardiner: That's clear. And perhaps a quick one to you, Christian, on the gross margin outlook for 2024. I understand the point you're making about if LED was to grow within the mix, then naturally that would be a pressure on the gross margin. But you guys had also explained that we're only in the initial phase of the G10 migration, which is -- previously, you've said it a higher gross margin tool. So in terms of those moving pieces, why are we not seeing some of the more positive impact of the G10 broadly? And then I suppose if I think into next year if power is growing more strongly next year, then why wouldn't the gross margins expand in '25?

Dr. Christian Danninger: So thanks, Andrew, for bringing this up again. Yes, this is really important to get this fully understood. In this year, we are seeing this additional wave of traditional LED shipments coming. And this -- and as I mentioned, this will impact our overall gross margin around the 1 to 2 percentage points. Somewhere in this area. And we see this for this year. And next year, then with an improved end-market mix, improved product mix, we should see this effect go away. And very specifically on the G10 margin profile and competitiveness of the systems, we do not see a margin erosion. How it exactly will play out in 2025, depends, of course, then on the mix between the transition old system to new system generation to the G10s, but as they are so competitive, we see that trend completely there, and SiC completely strong all going into the G10-SiC in the GaN and AsP we will see how far it goes.

Operator: The next question comes from Lee Simpson from Morgan Stanley (NYSE: MS ).

Lee Simpson: Maybe if I could, I mean, I think it's quite clear your rationale for not giving an order book guide. But I think maybe in the past, it's always been the assumption that order book would deliver ahead of the sales in the out year. So would it be fair, given that we have a looming 2025, that the order book should at least be higher than the sales you've guided for '24 as we go through '24. But as I hear things, perhaps things will be lumpy, certainly with regards to silicon carbide as a market driver.

Dr. Felix Grawert: Yes, I think could very well happen.

Lee Simpson: Okay. Maybe as a quick follow-up to that. I think you mentioned that gallium nitride for power would stretch up to 1200 volts. Considerable voltage limitations being breached there. Where do you think the applications would be that would adopt the 1200-volt use of gallium nitride?

Dr. Felix Grawert: With 1200 -- I think a very good question. With 1200 volts, you can address two very large-scale applications. The one application is you can use it in the gallium nitride, 1200 volts you can use it in the onboard charger, right? And you cannot only use it in the onboard charger, but even for the high-voltage architectures like in 800-volt battery systems, 800-volt battery systems is typically fine, for example, Audi Porsche (ETR: P911_p ) has that in their high-end platform. When you want to charge 500 kilometers within 20 minutes, you need the super high power to go through. And then typically, you use the higher voltage for the battery. So you can use it for that one. And the other application, 1200 volt is you can employ it in the main inverter as a potential substitute for silicon carbide as an alternative.

Lee Simpson: Perfect. Maybe just a quick one. I thought it was interesting that you talked about the supply chain dynamics for microLEDs and where you thought some large display players would come in, particularly with their raft of IP and process IP they have in microLEDs. But it's always been -- and you've sort of alluded to this, and I think in the margin, it's always been an issue mass transfer moving from a sort of optic platform to CMOS silicon. What do we think here? I mean maybe again, personal view, what do we think here could be that which cuts the Gordian knot? Are we going to see magnetics take hold? Or is there another technology that helps us bridge the mass transfer problem?

Dr. Felix Grawert: I think the person who has that answer has a gold nugget in his hands. I think many really smart people in this world, CTOs of companies, senior scientists getting their head around it. I have to admit, I cannot unfortunately give you the answer to it. I can only tell you that, in fact, there is a gigantic breadth of technologies in place or under -- yes, under scientific evaluation right now, be it a laser-based transfer, to cut them out, be it based on fluidics and printing, be it on something putting stuff in a liquid adhering with magnetics. I think you were alluding to that one. Others still working with stamps. Then, there is other technologies trying to do that with a MEMS device like a little gripper, trying like an excavator on the construction side to grip the microLED and put it somewhere else in another place, but with a MEMS device a couple of 10,000s or 100,000 in one step, honestly, I think nobody at this point really knows. I think that's really the road blocking point that's holding this whole industry off. I can only describe to you the problem. If I would have the answer in my sleeves, I could also be much more concrete about the timing for this market, I believe.

Lee Simpson: Great. That's a very good answer.

Operator: And the next question comes from Didier Scemama from the Bank of America (NYSE: BAC ).

Didier Scemama: Sorry for a very stupid question, but -- I mean, obviously, AMS said on their call this morning, they are -- they want to get rid of the -- or at least resell the equipment they bought from you and from other suppliers. So my [Technical Difficulty]

Dr. Felix Grawert: Didier, are you still there?

Operator: I'm sorry. Didier got disconnected.

Dr. Felix Grawert: Okay. Then, we take the next question and maybe he will dive in again.

Operator: Yes. Just a second, please. Let me just check, just a moment, I'm sorry. We have Didier still in the line. So please, Didier, you can go ahead now.

Didier Scemama: Hi, can you hear me now?

Dr. Felix Grawert: Now, yes. You got cut off after a few words. Please say it again.

Didier Scemama: After I said AMS, I got cut off. Anyway, no, I just wondered -- I mean, they said on their call this morning, they want to sell the equipment they bought from you and some other suppliers. So is that -- could you buy back the equipment from them? Or would you have to compete in a sort of a grey market with them from either other microLED chip makers or -- and that's my stupid question, really. Can this equipment be repurposed into something else than microLEDs like GaN and SiC or not?

Dr. Felix Grawert: So I cannot comment about the types of equipment they have from us. Again, this is customer confidentiality. I think we need to sort all this out. It's not a new statement to me. I think it needs some time to really get that out. Please understand that we cannot take a position here.

Didier Scemama: Okay. Okay. No problem. And on the R&D, I was just a bit surprised by the mid-single-digit increase year-over-year. So your R&D sort of is much more, let's say, volatile on a quarterly basis. So why is it so volatile? I mean, we have thought R&D is more of a fixed cost. But have you got a lot of consultants or variable costs in R&D that we should be aware of?

Dr. Christian Danninger: I mean, overall, you're right, yes. We are very much making sure that we keep fixed costs at a certain level. And then the peak loads that we have to drive these improvements here, final improvements on the G10 series as Felix explained, we're working with external resources. So flexible resources, allowing us then also to drive this down without any problems. That's the strategy that we follow if these efforts should go down then when this parallelity resource, finalizing the current platform and then focusing on the next one.

Didier Scemama: Okay. And do you care about commenting on whether microLED system just in general, can that be repurposed into power electronics or opto?

Dr. Christian Danninger: It depends on each type of equipment. We can't make a general statement here.

Operator: Now we're coming to the next questioner, it is Juergen Wagner from Stifel.

Juergen Wagner: I have a question on your market share in power. Yes, how is that at the moment or has been shaping out last year in GaN and silicon carbide and also the slowdown you have been mentioning, where do you see that? I mean it's silicon carbide, right?

Dr. Felix Grawert: So the market share, our market share in gallium nitride remains very high, in the high 90s. Our market share in silicon carbide, we see somewhere between 50% and 60%, putting us in a clear number one position in silicon carbide. Regarding to the slowdown in silicon carbide, this is an overall pattern which we observe across multiple players, just as a market pattern overall, not a specific player.

Juergen Wagner: Okay. And your underlying assumption is that it will quickly come back in '25?

Dr. Felix Grawert: Yes, in '25, as we have indicated.

Operator: Now we're coming to the next questioner. It is Gianmarco Bonacina from Equita.

Gianmarco Bonacina: A couple of questions from me. The first one is on the sales outlook. You are ending 2023, with the same backlog you had at the end of 2022, so about €350 million. What makes you confident that you can actually achieve growth and not achieve the same revenue level you had in 2023? The second question is on silicon carbide. If I heard you correctly, you said that you had some new customer win. Nonetheless, silicon carbide will not grow in 2023. So is this because your big customer will reduce the -- let's say, the level of orders in 2023, and the new one will make smaller orders? Or if you can maybe elaborate a little bit more.

Dr. Felix Grawert: So first of all, on the growth, I have indicated towards the beginning of the call that based on our pipeline, we are shooting for the upper range of our guidance. Nevertheless, the lower one takes some precautions on potential negative effects. That's our assumption for the growth guidance that we have provided for this year. And when you ask for the backlog and compare the backlog end of '22 with a backlog end of '23, you have to take into account that at the end of '22, a number of shipments and the double-digit million range didn't go out, which is why also in '22 became pretty low with respect to the revenues. While in '23, everything that we wanted to ship out, we could ship out. So the effect that the backlog was stable in two years, one after another, was so that they mostly dominated by a one-time effect at the end of '22. I think this is what you have to take into account. So -- and then when you put that in mind, then everything makes sense again as an overall pattern. So with that, let me come to your second question in silicon carbide. Well, we all know that in general, for AIXTRON for our markets, the orders are lumpy and they come in chunks. I mean the customers' order when they order and they build a fab, typically fabs are getting built out in stages or in waves. And those waves are just falling how they fall. I think this is a general statement upfront. It's not like a continuous pattern with one customer ordering every quarter one tool and the other customer order two tools. So to say, on a continuous basis, but it's rather here an order for 10, here's an order for five, here's an order for 20 or whatever, right? So first of all, the orders fall as they fall. In this pattern of customers sharing their forecast with us because they, of course, want us to prepare on ourselves and to prepare our supply chain such that we are then able to deliver. Based on this pattern, we have simply seen that '24 is going to be a bit slower. However, the pipeline is building up strongly for '25, which is the basis for the statements we've made on this call.

Operator: And the next question comes from Madeleine Jenkins from UBS.

Madeleine Jenkins: I just wanted to get a sense of the order behavior at the smaller silicon carbide customers, I guess, from out of the five major device players. I was just wondering if it tends to be kind of smaller units and they're ramping slowly or whether they're placing some bigger orders and aggressively trying to get into the market?

Dr. Felix Grawert: Well, I think it depends, first of all, what is the smaller customers, right? And many -- behind many customers, we see very large groups or many of our new customers, we see very large groups, very powerful groups who are now entering silicon carbide. So when we say smaller customers and in some of the cases, we mean a very large, a very powerful company, who is now entering silicon carbide and starting maybe with a small number of tools, but clearly having very ambitious road maps behind it. So yes, in some cases, this is customers starting with a small number, doing the R&D, doing their customer qualification; however, having quite substantial ramp plans behind it. I think with small customers, we do not need a larger well-equipped startup or something like that, which may order, I don't know, two or three tools per year, but we rather talk about some of the big semiconductor companies who really say, now yes, silicon carbide is such a big game. We want to be part of the party.

Madeleine Jenkins: Okay. That makes sense. And then just my final question. I don't know if I missed this, but could you please provide your current lead times, if you can? And also whether you see any risk of push-outs of orders in your backlog and how this kind of might impact your revenue guide?

Dr. Felix Grawert: I think I didn't get your question. Can you repeat it, please?

Madeleine Jenkins: Oh, yes. So just your current lead times and then, is there any -- are you seeing any risk of push-outs of orders in your backlog and how this may impact your revenue guide?

Dr. Felix Grawert: So our current lead time is around 9 to 12 months and push-out, we have seen in one single case but not across the board. So no unusual pattern.

Operator: And we have a follow-up question coming from Olivia Honychurch from Jefferies.

Olivia Honychurch: Just one for me, another one for silicon carbide. You said in answer to an earlier question that you've won a number of new customers, some small, some large. I'm wondering if I can ask as to whether that large customer we can think of as being one of the top five or the top-tier players in SiC or is it one of the second-tier or newer entrants into the market?

Dr. Felix Grawert: Olivia, I have expected the question comes in every of our calls. So you get me a smile on my face. That's absolutely fine. We have decided, in this case, not to shine light on this topic because also there's quite some competitive demand dynamics behind it. Please hold on and allow us to not answer this question directly.

Operator: Thank you very much. There are no further questions. And with this, I hand the floor back to Carsten.

Carsten Werle: Thank you, Beatrice. Thank you very much for taking part in our call. I got a few e-mails at the beginning that some had difficulties to access the call in time, so our sincere apologies for this. Whenever you have -- whenever you think you have missed anything or have any additional questions, please give me a shout. And as I already said at the very beginning of the call, we will put a transcript on our webpage in the next couple of days, so that you also have all the information there. And I think we are all looking forward to speaking and meeting you in the next couple of days and weeks, and wish you a good day.

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