Good morning and good afternoon, ladies and gentlemen, and welcome to AIXTRON's First Quarter 2020 Results Conference Call. Please note that today's call is being recorded. Let me now hand over to Mr. Guido Pickert, VP of IR and Corporate Communications at AIXTRON, for opening remarks and introductions.

Thank you, Operator. Let me start by welcoming you all to AIXTRON's presentation of our Q1 2020 results. I'd like to welcome our executive board, represented by Dr. Felix Grawert and Dr. Bernd Schulte, as well as our VP of Finance and Administration, Charles Russell. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcast without permission. Your participation in this call implies your consent to this recording. Please also note that our safe harbor statement, which is included in our results presentation, applies throughout the call. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or a transcript on our website at some point after the call. I would now like to hand you over to Dr. Bernd Schulte and opening remarks. Bernd?

Many thanks, Guido, and let me welcome you to our first quarter 2020 results presentation. Let me start by giving you an overview of the key developments in the quarter. We had a solid start to the year, with orders in Q1 coming in at €68.8 million, which is 28% above the same quarter in 2019 and 15% below the very strong Q4 of last year. In Q1, revenues came in at €41 million, which is low due to the depressed order intake in summer last year, and it's slightly below our planning for the quarter as the delivery and the commissioning of some of our tools into Chinese customers were delayed into Q2. That said, we do not see at this point a significant influence on our business from the coronavirus. But to be clear, we cannot rule out that an extension of the restrictions that apply worldwide could at the very end also affect our business. In the first quarter, our other key financials were also largely in line with our plans except the achieved gross margin at 36%, which was influenced by the delayed commissioning of a number of tools in China as a result of the pandemic. EBIT ended up being at the low negative side at €1.1 million, while free cash flow was at €3 million. We finished the quarter with an order backlog of €146.3 million, which is 16% over the same period last year and gives us the confidence that we can meet our 2020 full year guidance, which we communicated to you on our last call. Despite the pandemic, we continue implementing our strategy, a core part of which involves the renewal of our entire MOCVD product portfolio over the next 18 months. We remain confident about our prospects for two reasons. We do see continued customer interest in our products to further build out critical communications infrastructure, contactless sensing, energy efficient power electronics, and innovative displays. Technically, our focused investments into next generation deposition tools for the compound semiconductors and OLEDs will open new market opportunities for our equipment and get our business in the future in an even better position. At this point, let me now hand you over to Charles for a more detailed overview of the Q1 2020 numbers. Charles?

Thanks, Berndt and hello to everyone. Starting on slide 4, our income statement, total revenue for the quarter at €41 million was lower than in recent quarters. This reflects both the generally low order intake in the relevant period of last year and a much lower level of system commissioning in China in Q1 because of the lockdown. These factors resulted both in lower utilization of installation personnel and a lower utilization of production. Relative to Q4, the effect of the underutilization on gross margin was around 5%. Operating expenses, at €16 million, were less than the €20 million in the previous quarter. SG&A expense was €7.5 million compared with €6.8 million in Q4. The additional expense mainly relates to recruitment and additional IT costs. R&D expense of €14.4 million was €0.6 million less than in Q4 because of lower expenses for MOCVD projects. Net other operating income of €6.2 million was higher than the €2.3 million in Q4. Q1 income included the reversal of €2.9 million of impairment provisions against a building in Germany, €1.9 million of R&D grants, and €1.2 million of exchange rate gains. EBIT was a loss of €1 million compared with a profit of €14 million in Q4. Net income was also a loss of just under €1 million. Turning to the balance sheet on the next slide, inventories of €85 million include around €12 million of prototypes, both on-site at customers and in our facilities. Receivables, €17 million, represent 30 days sales outstanding, the same as at the end of Q4. Customer deposits increased to €60 million in Q1 compared to €51 million at year-end. This reflects the strong order intake. Moving to slide 6 and our cash flow statement, we had free cash flow of €3 million in the quarter, which brought our overall cash balance up to €300 million. And with that, let me hand you over to Felix.

Thank you, Charles, and welcome to you all. I will give you a short overview of the developments within our portfolio, of our approach to handling the pandemic, and of our outlook. Let me first speak about our OLED business, APEVA. We are going through the qualification process with our Korean customer and make good technical progress. Some technical challenges have been solved. Other topics are still a work in progress. The end of the Gen-2 project and, with this, a decision about a follow-on project has come closer. But we are not there yet, and a few months of work are still ahead of us. In our MOCVD business, we are seeing solid interest around our mini and micro LED solutions, both for large display applications and for small wearable devices like watches. Furthermore, in optoelectronics, we see growing demand for lasers, in particular for telecom applications. In power electronics, we see strong interest from multiple market segments, gallium nitride power, gallium nitride RF, and silicon carbide, which gives us confidence that this market is moving from R&D to large scale volume production. Let me now give you some background information on how we handle the COVID-19 challenge. Our production is up and running without interruption or delays. Early on, we have enabled many of our employees to work from home. At our premises, we have implemented strict measures such as mandatory wearing of masks, shift work to reduce the risk of entire teams being quarantined, protective measures in our cafeteria, and others. We are working closely with our supply chain to ensure uninterrupted inflow of materials for the ongoing production of our products. As part of these activities, we have preordered materials for anticipated production capacities in the second half of this year. We continue to serve customers with spare parts worldwide, and we have created backup solutions for critical cases. In some countries with strict lockdown orders by government, we have obtained the status of critical infrastructure suppliers with the help of our customers, and therefore all our branches worldwide are fully operational. As a result of this, we can confirm and reiterate our guidance for the year 2020 that we had given in our last call. The executive board continues to expect revenue and order intake to be in the range between €260 million and €300 million, a gross margin of approximately 40%, and EBIT margin between 10% and 15% of revenues for the full year 2020. This expectation is based on a solid order book at the end of the first quarter and the healthy level of customer inquiries, particularly around LED-based display applications, laser for optical data transmission, and next generation power electronics. We have assumed for our budget this year an exchange rate of U.S. dollar 1.20 per euro, and that the full results of our OLED business, APEVA, are consolidated. With that, I will pass you back to Guido before we take questions.

Thank you very much, Felix, Charles, and Bernd. Operator, we will now take questions, please.

[Operator Instructions]. And the first question comes from Ms. Charlotte Friedrichs from Berenberg. Please go ahead.

The first one would be around the order intake. Can you tell us what the spread across the end markets is here in the first quarter?

Yes. Thank you for the question. I think the strongest portion of order intake came for LEDs, LEDs for mini LED and the other display, but not micro LED applications. So this was about, I'd say, around 40%. And the rest was mixed between lasers mainly for telecom and a little also into power electronics, RF applications.

And around the slippages that you mentioned also in your press release this morning, can you give us an idea of what kind of an effect do you expect for Q2? Is it reasonable to assume that basically all of these will come into Q2, or could it maybe take later or some of them may disappear altogether?

Yes. So we mentioned that there were a small number of shipment delays in China were customers asked us to delay the shipment and move it from the first quarter into the second quarter, and also a couple of final acceptances could not be conducted in China. We now know that China is fully up and running, so these things will be done in the second quarter. They have just moved by one quarter forward. I think there is a good probability that in the second quarter -- we know currently that Europe and the U.S. are mostly affected by the pandemic. There is a certain chance that the same will happen to a couple of tool shipments for European and U.S. customers and also a couple of acceptances with these customers. However, on top of those that we were expecting now, the ones from China are coming up, so it should come out in a wash. And then finally to be mentioned, those things from Europe and the U.S. may shift into the third quarter, but we are confident that we will conduct them within the year 2020, both the shipments as well as the acceptances, so it does not affect our guidance for the entire year at all.

Okay, understood. And then my final question would be around sort of the product mix across the year that you expect and sort of tying in with the feedback that you have received from customers on your silicon carbide tool. And also now with smartphone shipments, perhaps also a bit about the 3D sensing end market, what you're hearing here from customers.

Yes, we are seeing, as we mentioned, I think a very healthy mix across these different applications, as we mentioned in our speech and in our publication. So certainly we expect to see growth into the area of the very innovative displays, meaning this includes mini LEDs as a backlight solution for LCD, but also fine pitch display for large display solutions, but also first investments into micro LED, as we already have mentioned. So that is [Technical Difficulty] but we see also a growing demand into power electronics. And they are both gallium nitride and silicon carbides, and certainly telecom infrastructure buildup we expect gets accelerated due to the current situation. And the only thing we still await to come back is the 3D sensing. As we mentioned in our last call, this is to be seen when this comes back.

And the next question comes from Janardan Menon from Liberum. Please go ahead.

Just to go back to the previous answer on the LEDs, the display side on the 40% you said, would the biggest driver there be mini LEDs for backlighting? And I am just wondering, can you give me a feel for how big you think that market could be? Obviously, long ago you had backlighting as a big driver of revenues at one point. I'm just wondering, is this the start of a new trend and do you think that, if this spreads across the LCD market, will this be a material driver of orders for you going forward, or do you think it will remain a contained thing and that growth will be more in the micro LED and other areas?

Yes. Thank you, Janardan. I think it is driving certain demand, in particular for the red colored dot, simply because for blue and green there is a lot of installed capacity out there, which has been installed mainly for general lighting applications. But the red color, certainly you need as many red colored systems as well. And also what we're seeing now, that LED companies who previously have focused -- due to the their focus on maybe solid state lighting and they are now looking into the mini LED and fine pitch LED applications, they now want to have in-house supply of red LED. And that we are seeing really as a trend. And our main market contribution into LED here for this application is the red color, and that's what we see in the moment. Whether this is a huge application to continue is to be seen, but in the moment we are definitely enjoying this trend.

Understood. You have talked about the renewal of your portfolio, how it's -- across the various segments you're renewing it. I was just wondering, would that have a positive impact on gross margin? Is cost reduction of the bill of materials a key part of the renewal? And if so, when would we start seeing some of that coming in through the numbers?

Thank you, very good question. So our new products across all the different application segments will be released step by step. The new silicon carbide product we brought out in the fall of 2019. Sometime later this year a product about power electronics will follow, later on a product about the laser and the red micro LED. So step by step this is going. Typically in our industry when we bring out a new product, we first bring out a so-called beta tool to two or three customers, lead customers, to qualify the product and to gain field experience based on value of the customer feedback, and only after that phase we then go into volume production for the broad market. So it's a step by step process. And that step by step process is concluded only at the point when we really go into the volume production, rolling production, roll out the new product for all customers. Then we will see the impact on the gross margin. And yes, for sure we bring out the new product generation to significantly increase our competitiveness and of course maintain market share in these growth markets, but also the increased competitiveness brings a significant increase in value for the customer. And part of it, of course, we expect to trend later into gross margin improvement, which you will then gradually see, coming to the timing, within the year of 2021 but not in 2020.

Understood, very clear. And lastly just a question on how you expect the revenues to come through. You've started quite low in Q1. You said that's because of the nature of the order intake last year. Is this going to be quite a second half loaded year, or will you see a good snapback in Q2 itself to meet your full year targets?

Yes, Janardan, can I just guide you to the last slide here in our presentation? There you see the typical pie chart of what we expect, and you see that we need about €40 million to €80 million of new system orders in the second quarter, or maybe even early Q3, which are shippable within this year to be within the lower or higher range of the guidance. And I'm glad to say to you that in the moment we're seeing continued healthy discussions with customers and inquiry levels continuing. So we feel quite confident that we will be in the range. The only thing which is the final risk is our supply chain stay to be as good as it is in the moment, but we are quite confident and we have taken the most possible measures you can do. So I think we feel quite good about this.

And the next question comes from Uwe Schupp from Deutsche Bank. Please go ahead.

Firstly, on the export licenses please, I remember that this was an issue on some of the previous calls, and I was just wondering whether the situation has improved here. Obviously, the main reason is that there may be a work from home attitude also in the Berlin departments in that particular area in the public sector, and I was just wondering whether this has an ongoing impact on your business. Secondly, speaking of work from home, is that a warm rain currently for you because of higher demand from data com customers? And then lastly, Felix, just so we can cover it, just a brief update, please, there on the program. We are seeing some push outs here and there on the silicon carbide side from Q2 into H2 for various reasons, obviously COVID being not the least one. Just the number of beta customers would be interesting and what you generally judge the level of interest at the current stage.

Yes, Uwe Schupp, let me start with the first two questions, the export licenses. Honestly, I certainly am not in a position to give you an efficiency rating of the German government. However, in the moment, we do not have issues with export licenses, but this can be simply a timing effect or just the orders we are currently shipping. So in the moment it's no issue. And you speak about whether basically the demand in data rates and telecom speed rates and so on can give us a boost in the business. The answer is yes, but it's not immediate. When there is a decision to increase infrastructure until our customers get orders and then have to build up new capacity just takes a while. But overall, my expectation definitely is it will give us additional wind from the back.

And let me come to the question relating to the silicon carbide program. You are right. From the market from the side of our customers, there are a couple of tool decisions and the ramp up has been pushed out. I would say roughly we heard throughout the year 2019 that customers were planning to make tool decisions and start the build out of their factories in the fourth quarter of 2019. And this has been moved out, I would say, towards the second quarter, third quarter of 2020, so maybe 6 to 9 months of a delay coming from the market due to a bit of slightly lower demand in the market, automotive market and so on and so forth. On our side, this fits our schedule even better, so we see that as a benefit. We like that fact. And simply from the fact that, in terms of number of beta customers, we have our automated tool on the ground with 4 or 5 customers where we are in the qualification phase. We do see a strong and a healthy demand for this tool. And we have orders for the tool from additional customers where we had to say we don't want to take too many beta at once until the qualification phases continued. So we have taken orders for the tool in the manual operated mode, giving the customer the chance to later switch on and add the automation piece of it. And this delay in the volume ramp, the delay of tool decision has helped us a bit because it better fits to our schedule of the qualification of the silicon carbide program. So overall, the effect is there and it fits in our interest. But we do not see the demand disappearing or the trend not coming. We rather see there is customer -- potentially even larger expansion plans coming in the future. We see also now Chinese customers kicking in in the market and additional demand coming from China that had not been on the radar yet. So the overall situation is helping.

And the next question comes from Taze Veysel from Bankhaus Lampe. Please go ahead.

Yes, Veysel Taze. The first one would be on some of your comments regarding gross margin. So you said underutilization had an impact on gross margin by roughly 5 percentage points. I was wondering at what revenue level do you see them disappear and how that's going to shape up for the rest of the year.

So yes, relative to Q4, the underutilization had an effect of 5% on the gross margin. And in terms of what level it would get back to a normal amount of underutilization, if you like, I think that would be when the revenue is around €55 million, I'll say.

Okay. And then on the OpEx, Q1 was flat versus Q4, so around €22 million. Is that something we should model in for the upcoming quarters as well, or some one-offs there?

Well, you should not model in a repeat of the exchange gain or the repeat of the release of the impairment provision of €2.9 million. So there's €4.1 million there which is not necessarily repeatable. But otherwise, I think the level of OpEx is pretty representative.

Okay. And then one question regarding your power business. So in Q1 you had roughly €11 million sales in power. And I was wondering what was the split, silicon carbide versus GaN. And then on GaN, a little color around current market momentum or demand momentum. So TSMC seems to have secured some designs. They invested a few years ago. Do you see them investing in new capacities? And how is the investment behavior regarding GaN in China? And then a final question regarding the OLED. Felix, you mentioned during your presentation a few months work still to be done, so an update there. Can we expect a decision still in first half?

Yes, thank you; quite a number of questions. Let me get started with the power electronics one. So order intake in the first quarter was about 20% gallium nitride, both power and RF combined, and about 20% silicon carbide, so power electronics amounting a total of 40%. You are right regarding and commenting to the market momentum. The gallium nitride is now a leader, gaining traction. You may look and analyze, for example, across the Chinese smartphone market and see what models have been launched, a significant number of them being based on gallium nitride-based quick chargers. You can open them up and do a reverse engineering or buy the appropriate reports of that. Then you will see who the makers of these are. A big part of that supply chain, some of them are fabless players, pointing then again back to fabless -- to foundries, one name you mentioned, that are producing and who see the demand picking up. So what you have stated is in fact also what we see when we look into the market, especially in Asia, especially in China. That being said, the volume ramp, for which in 2019 we have seen and we have commented in displays to see a pick up moving from the R&D stage to a volume ramp stage, that volume ramp is now really ongoing with consumers being able to buy the products in the Best Buy, in the Media Mart or whatever these stores are called. That is happening. With that, we do see orders from customers for expansion for volume and factory expansion coming, both the named and established players, one name you mentioned. And beyond that, we do see quite some momentum from smaller players and startups which are enjoying very healthy investment, both by venture capital and also by government entities in China. So China and Taiwan is a real strong voice in this ramp that we see. And of course, we also see that the Western players, they may not be yet in the smartphone models. But they are, I think, very fast to follow this trend. Let me put it this way. So the gallium nitride power electronics ramp is now in the early phase. With that, I would like to switch over to the OLED question. I mentioned earlier on that we are making good progress. We have concluded and completed a number of the development topics. Think about this between us and the customer, an agreed checklist of topics that need to be worked on and the specifications that need to be fulfilled. A couple of these points have been fulfilled and agreed that they are closed and done. A couple of other action items are still open and still need work. I would not want to comment now about the exact timing when that is done. You asked the question, is it going to happen this first half. That would give us two more months precisely from today. I think that would be overoptimistic, but I think it's a couple of months ahead.

The next question comes from Jurgen Wagner from MainFirst. Please go ahead. Jürgen Wagner: I'm sorry to come back to OLED. How much of your guidance for this year is OLED driven?

You mean revenue or order intake? Jürgen Wagner: Yes, both.

Well, it's both within our guidance. Jürgen Wagner: Yes, but can you quantify, or would you want to quantify?

No, I would not want to do that. Jürgen Wagner: But the way it works, if it's further delayed, even if the order comes in Q4, you would still recognize part of it as revenues, is that right?

I think that would be very difficult if the order comes in Q4. This is not the classic tool building business that we are in, but it's large scale and non [Technical Difficulty], which we announced in this place that we will record according to the POC method, so percentage of completion method. So think about a project which lasts 12 months or 18 months. So after one month, you can record as revenue only the percentage of the total that you have concluded in one month. And that would be a relatively small portion of it. If an order comes, for example, on the 1st of December, within one month it's a very small portion that you can complete.

And the last question comes from Malte Schaumann from Warburg Research. Please go ahead.

Just on OLED again, but could you confirm, or do you like to confirm that there will be a decision within the year 2020, maybe not in the first half but somewhere in the second half at the latest point in time? Would that be right to assume?

Yes, definitely.

And then the question is on the current pipeline, OLED pipeline. You mentioned that the discussion is quite healthy. But the customers, if they're doing it across the applications, are there areas where you see a certain sort of form of weakness, or are you saying most of the target applications are quite stable and healthy at the current stage?

Yes, it is pretty much what I said in the first question. The good things is we're seeing several areas getting high interest. Certainly one is for these innovative displays, meaning here the micro LED, mini LED applications. So we see definitely customers are preparing potential demand for production, but also for power, and when we speak about power, meaning both silicon carbide and gallium nitride. Felix just mentioned about the gallium nitride. And the silicon carbide ramp, we not only have beta customers, we have also existing customers who are ordering tools. And they do so, and they continue more or less as they announced, so that is going on. And we're seeing demand for the telecom build out of infrastructure, which I have mentioned already that we expect not to slow down or maybe even to accelerate due to the current situation where everybody appreciates a high-speed Internet connection at home. So these are the main drivers. And as I said, as expected, the 3D sensing market has not yet returned, and we all know that the cell phone market in the moment is not at its best. However, all the cell phone makers will come out with new models, and I think it's no surprise that all the new models will have a kind of 3D sensing solution built in. So of course, the high-end models, they are typically not the high volume sales, but we are seeing that customers in 3D sensing are pretty busy. When that then gets into orders, I told you last time I expect it earliest end of the year, and I think that statement still holds.

Yes. Okay. So no reason even of saying even in the recent weeks of the overall pattern. Then final question is on the competitive situation. One of your competitors launched a photonic dedicated tool earlier in the year. Do you see him gaining traction somewhere, or do you feel quite confident, especially when you will launch new tools as well? So any change in the overall competitive environment for your applications?

Well, in the moment, I think the situation is unchanged as in the past. Certainly, we are watching also the performance of the new tool of the competitor, which certainly is still in the market not yet qualified. But eventually it may be qualified, and then we have to see the situation then. But I also want to refer to what we said previously. We don't stand still. We spoke about our new product introduction programs, and that certainly includes next generation of tools for lasers and gallium arsenide-based materials. So we will come out by end of the year, early next year with our next generation tool, and we feel quite confident that we can at least maintain our market share.

Thank you very much for your questions. Let me hand back over to Guido Pickert.

Thank you very much. With that, we conclude today's call. You know where to find us in case you have any follow-up questions. And please all stay healthy, and goodbye. Thank you.