Good afternoon, ladies and gentlemen, and welcome to the conference call regarding the Q1 2022 Results of AIXTRON SE. [Operator Instructions] The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Guido Pickert. Please go ahead.

Thank you, operator. Welcome to our presentation of Q1 ’22 results. I’d like to welcome our CEO, Dr. Felix Grawert and our CFO, Dr. Christian Danninger. As the operator indicated, this call is being recorded by AIXTRON and is considered copyright material. As such, it cannot be re-recorded or rebroadcasted without permission. Your participation in this call implies your consent to this recording. Please take note of our Safe Harbor Statement which can be found on Page 2 of our results presentation slide deck, as it applies throughout the conference 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 our CEO for opening remarks. Felix?

Thank you, Guido. Let me also welcome you all to our first quarter 2022 results presentation. I will start with an overview of the highlights in the quarter and then hand over to Christian for more details on our financial figures. Finally, I will give you an update on the developments of our business. Let me start by giving you an overview of the key business developments in Q1 on Slide 2. The demand for our equipment remains very dynamic across the board resulting in the strong order intake of €130 million for Q1. The demand for GaN Power is solid and high levels while silicon carbide power demand is further accelerating to become a major contributor. Additionally, demand for Micro LED production has started to kick in while demand for Laser tools remain -- is remaining strong as well. Overall, the positive trend of further diversification of demand drivers across different end markets is continuing as expected. Operational performance in the quarter was very strong as well and fully in line with our own expectations, enabling us to recognize revenues in the quarter of €89 million, which is almost 80% higher year-on-year. EBIT also went up significantly and net profit more than tripled year-on-year. Based on the strong start into the year in all dimensions, we confidently confirm that we are fully on track to meet our full year guidance for orders, revenues, and profit margins. Please recall that we had indicated with our guidance a moderate start to the year 2022 in terms of revenue, with a much stronger second half. We are fully on track with respect to our initial plan. We are happy to be on such a good track. In particular, I would like to remark that the current global crisis situation that we are all facing has only a minute impact on our business. Logistics and supply chains are tense but remain stable. Our proactive approach to pre-order critical components and to work closely with our suppliers proves to be effective. This approach allows our suppliers to adopt their own capacities to our increasing demand and to provide us with stable supply. Most of our suppliers are situated in Western Europe, giving us a stable basis despite the strain on global supply chain. Now, I will hand over to our CFO, Christian Danninger. He will take you through the Q1 2022 financials. Christian?

Thanks, Felix, and hello to everyone. Before I start the review of financials, I'd like to share some ESG related feedback on our excellent EU taxonomy aligned figures which we published with our Sustainability Report in February. We are one of the very few companies in Germany, if not in Europe, that already published EU taxonomy aligned figures. And we reported more than half of our revenues and three quarters of our R&D activities as officially green, as defined by the EU. Our ESG focused investors are particularly impressed by these results and understand more and more that our technologies have a very strong positive impact on climate change mitigation. Let me now start with our income statement on Slide 3. Total revenues for the first quarter [2020] were €89 million. This was close to 80% higher than in the same quarter of the last year. The gross margin at 41% went up by six percentage points compared to Q1 2021. This is mainly due to an improved product mix and more favorable US dollar rate and better absorption of costs due to higher revenues. This resulted in a year-on-year doubling of Q1 gross profit of €36 million. OpEx in the quarter increased to €22 million from €18 million, mainly due to higher R&D spending, reflecting our focus on finalizing the development of our next generation MOCVD product ahead of a broader market introduction. Our EBIT in Q1 of this year went up to €14 from negative €1 million, the year before. The EBIT margin was 16%. We were again able to utilize tax loss carry forwards and capitalize some additional deferred tax assets in the amount of €1 million due to expected future profits. We can therefore report a net profit of €14 million, which more than tripled compared to €4 million we recorded in quarter one of ’21. Turning to the balance sheet on the next slide. Inventories have risen to €144 million from €121 million at the end of 2021, in preparation for the higher expected business volume in the coming quarters. Due to the high demand supporting the growth expectation for 2022, advance payments received from customers increased to €81 million from €77 million at the end of ’21 which will represent about 31% of our order backlog. Trade receivables went down to €50 million, mainly due to the collection of payments after the very strong shipments in Q4 of last year. Our cash balance including other financial assets increased to €375 million at the end of the quarter from €353 million at the end of ’21. Moving to our cash flow statement on Slide 5, free cash flow for Q1 2022 was €22 million was slightly below €28 million the year before, which was mainly due to the increase in inventories in preparation for the higher expected business volume in the coming quarters. With that, let me hand you back over to Felix.

Thank you, Christian. Before concluding with the outlook for the remainder of the year, I would first like to give you a quick update on the key developments in our addressed markets. In all our addressed end markets, we continue to see strong momentum. In the first quarter, gallium nitride power was our single biggest revenue contributor. In order, wide-band-gap power electronics including GaN and silicon carbide accounted for more than half of our equipment orders while GaN being the single biggest driver here as well. Energy efficient power electronics are being broadly adopted in increasing number of applications replacing less efficient silicon. This is clearly reflected in the continued strong demand for our system in these areas. In GaN Power, we see the momentum remaining as strong as we have seen it in the recent past. The industry now has clearly accepted GaN Power devices as the energy efficient replacement of the incumbent silicon based power devices. Not only will GaN replace silicon more and more existing applications, we see the market broadening at the same time. We observe new players entering the GaN market, addressing new applications, while existing players are about to implement their ambitious expansion plans for their factories. In silicon carbide power, we see a continuation of the industry growth driven by an increasing number of electric vehicles. Industry analysts expect that by 2025, the penetration rate of electric vehicles exceeds 30%. And all of them need wide-band-gap materials such as GaN and SiC based power electronics in the main inverter, onboard charger and the fast charging infrastructure on the road side. Our new silicon carbide tool which is in preparation for wafer sizes of 6-inch and 8-inch, is showing very good performance. We are in the qualification at multiple customers and already have received repeat orders with high numbers of tools ordered by some of them. Overall, we continue to win new customers in silicon carbide power electronics, while our existing customers are expanding their capacities to meet the growing market demand. In the area of Micro LEDs, we see the development of next generation Micro LED displays continuing as expected. We are involved in multiple customer development activities and qualification project. The epitaxial process step which is performed on our tools is showing good performance and maturity. Work on the complementary transfer process step not offered by us is also progressing. This makes us increasingly confident that we will see further commercial products with Micro LED displays in addition to smartwatches, going forward. We therefore expect first customers to start building out their production capacities in the year 2023 and ’24. And please bear in mind that Micro LEDs, that’s four Micro LEDs, we will be providing tools to make the red, the green, and the blue color Micro LEDs. With this, we address a much larger scope than in the traditional LED area where we only address the red color today. The high quality requirements of the Micro LED application allows us to cover the whole color spectrum again. Let me finally give you an update of the development of our new tool generation. We have the next generation of products for all three materials systems under development. These new tools have in common that they offer significant benefits in terms of uniformity, in terms of particle levels, and in terms of productivity. With this, they enable our customers to reduce unit cost in the production and penetrate additional, much broader application end market. Here is where we currently stand with respect to our next generation products. Our next gen laser and micro LED product which is the successor product to our G4 planetary system is under qualification at three major accounts. Our next-gen gallium nitride power and Micro LED product which is the success of our G5 planetary system is already qualified by a Tier 1 customer who operates multiple tools and has placed multiple repeat orders. And our next-gen silicon carbide product which is the successor of our G5 warm-wall planetary system, is under qualification with multiple customers and we have received orders for double digit numbers of units of it. During this year, we will continue our qualification efforts and complete the preparation for launching our new tools gradually, starting by the end of this year. As you can see, we've made great progress in preparing the ground for a volume ramp of the industry, translating into further growth in the coming years with our new tools being ready for that. With that, let me now give you an update of our full year guidance for 2022 on Slide 6. Based on the strong business development in the first quarter and our positive view on the development of market for the remainder of the year, we confirm our growth guidance for the year 2022, which we originally issued in February. Including the €130 million of orders recorded in the first quarter, we continue to expect total orders for the year in the range between €520 million and €580 million. With an equipment backlog of €260 million at the end of Q1, we expect revenues for 2022 to be in the range between €450 million and 500 million. We expect to achieve a cost margin around 41% and EBIT margin in the range of 21% to 23%. These expectations for 2022 are subject to the provision that the current global crisis situations around us will not have a significant impact on the development of our business. With that, I'll pass it back to Guido, before we take questions

Thank you very much Felix, thank you Christian. Operator, we will now take a question, please.

Thank you very much. [Operator Instructions] And the first question comes from Stephane Houri. Please go ahead.

Yes. Good afternoon. Actually, I've got two questions. The first one is on the, let's say the linearity of the revenues for the year. I think that's like many others in the market, we understood that the year would be less back end loaded than the previous years. Which is the case but some may have expected a little bit more in Q1. Do you confirm that you were not expecting higher revenues for the quarter? Can you tell us how you see the next quarters? And can you re-explain to us why there is such a seasonality in your business? And I've got the follow up. Thank you.

Yeah, let me take that. Stephane, hello. So the revenue distribution over this year, if you remember, when we issued our guidance in the -- in February, we mentioned that we would be starting a little softer in the year 2022 and then much stronger or significantly stronger in the second half of the year. And nevertheless, we also indicated that it would not be such an extreme variation across the quarter as we had it in 2021. Let me be a little more concrete, yeah. If you remember, in 2021, I think in the fourth quarter, the revenue was almost three times or four times larger than -- in the Q4 than in Q1, so that was an extreme variation, yeah. So in 2022, we will not see such an extreme variation again. However, as you have seen, now with our first quarter, it was a little softer, the second quarter will be stronger, the third quarter will be stronger, and the fourth quarter will be a little more stronger then. So overall, we look at, as we have indicated, we are fully on track with our initial plan, really fully on track with our plan. Yeah, no shifts, no, nothing like that, to be very clear and upfront outspoken about that. Yeah, we have a bit stronger second half than the first half.

Okay. Okay. And can you maybe just explain why there is seasonality in your business because this is not so obvious for many others, I think?

This is just how the orders are coming in. I would not expect that this pattern, necessarily, it's like, a Christmas business, what you see in some consumer electronics or so. It's just how the orders are coming in. So it could also be that in two years or three years, so we may have it all the way the other way around. I think it's just randomly distributed. It's not like a seasonality attached to the annual calendar or the seasons of the year.

Okay, okay. Thank you. And my second question then is on the orders, because if you look at the orders €130 million and you multiply by four, basically, you are at the low end of your guidance for the full year for orders. So obviously, you may expect an acceleration. Is it coming already in Q2 and from which end market does the order’s acceleration will be coming? Thank you very much.

And it's also for the orders. And as I just indicated with the first part of your question, Stephane, certain randomness. So I would not give you now the exact distribution, how they come over the year, I can definitely say that we expect a very clear acceleration of the orders throughout the year, that I can indicate to you and confirm very, very firmly on that one. And we, for sure, expect a stronger second quarter in terms of order intake than the first quarter. And in terms of split over the application, looking at the full year, I think we had already indicated with our guidance how the year 2022 could look like in terms of order intake. And I can only say that we are fully on track with respect to our initial expectation, which is let me iterate, that gallium nitride power electronics will be clearly the number one application followed by silicon carbide power and electronics and then the LEDs. There was just a beep in the line, I hope I'm still on. And then the LEDs and Micro LED applications would be the third place in terms of order intake.

And the next question comes from Olivia Honychurch. Please go ahead.

Hi, thanks for taking my question. And I've got one with a couple of follow ups after, if that's okay? So, on silicon carbide, we heard from Wolfspeed overnight that they are considering opening a second silicon carbide facility in addition to the recently opened one in Mohawk Valley, New York. And we're also hearing elsewhere that companies like Infineon and STMicro are building out their silicon carbide capacity. Considering that backdrop, do you see potential for silicon carbide to become a larger driver of orders and revenues for you than gallium nitride at some point in the future?

That is a very good question. You really get me to think, Olivia, on this one. I can clearly say that we see a strong acceleration of silicon carbide as we have had already indicated earlier, and we see that trend continuing. And so your question is very precisely whether silicon carbide might surpass gallium nitride and I have not modeled that. Yeah, so I cannot give you the precise answer to that. But I can clearly say that silicon carbide could definitely close up to get gallium nitride. And yes, I think for sure, given the randomness of orders that can be quarters, where silicon carbide might surpass gallium nitride because we see the strong momentum. And as we have indicated, we are also on a very good track with respect to winning new customers in silicon carbide.

Okay, that's helpful. Thank you. And just a couple more if that's okay. So firstly, on margins, are you able to give us a little bit of guidance on the shape of gross margin trends and OpEx over the next few quarters? Particularly on gross margins, I know you spoke previously about having a higher proportion of LED through shipments in the first part of this year. Has that played out already or is that still yet to come? And if so, would that mean that that gross margin dipped slightly, sequentially before ticking back up again? Similarly, for OpEx, how could that trend over the next few quarters? And then my second question is on Micro LED, your tools? Can you give us some type of indication of the yield that that's currently being achieved with your Micro LED equipment? Thank you.

Okay, Olivia, I'll take -- Christian here, take the question on the margins, then for the Micro LED question, pass over to Felix. We expect gross margin to be somehow lower in Q2, where we expect the larger orders for red LED business to China. This is fully reflected on our full year guidance. so being over compensated so that for the full year, we are fully completely in the guidance that we've indicated. On the OpEx side, we expect SG&A to remain fairly stable over the next quarters. While on the R&D expenses, we expect an increase in R&D costs, as we are pushing our -- pushing further the market introduction of the next-gen generation tools. So we expect the full year R&D costs beyond the €60 million. €60 million to €65 million, that's our new rate on R&D really pushing forward and driving forward our next generation tools. With that I will hand over to Felix on the on the Micro LED question.

Yeah, and so Olivia, I took your question that you're asking about the new red Micro LED tool. So that tool is giving, let me characterize that tool is a little bit, to shine a light -- some light on it. That tool is giving a significantly improved uniformity on the wafer in terms of thickness and doping control. And the tool also gives a much better efficiency in terms of gases and reducing therefore cost. And the tool also has a number of features to optimize and to reduce the particles. Yeah, which is very important. And the uniformity topics and the improved particle levels together as your question indicates, are then helping our customers to significantly improve the yield. However, we all know how it is in semiconductors, their use depends on many factors, namely, the size of the chips, the chip design, also the subsequent processing steps. So in the end, what yield each customer finally is making and getting out of that really depends on the specifics of the customer. So I could not comment on that. I can only speak about that the input, the prerequisites, the input parameters, we are making a big step forward. And we are enabling the customers to realize a better yield. Sorry for not being able to be really quantitative on that question.

No, that's, that's really helpful color. Thank you.

And the next question comes from David O'Connor from BNP Paribas. Please go ahead. David O'Connor: Great. And thanks for taking my questions, maybe a couple on my side, if I may. Firstly, on the Micro LED side of things. I think, Felix, you mentioned in your prepared remarks, the capacity built out in 2023-2024 timeframe. Just to clarify, is that just one customer there or is there other customers in the mix there? And also can you give us any indication when you look at your Micro LED customers, how much of a delta in terms of the lead time your primary customer has versus others? And also, can you just touch on the Micro LED tool that was in revenues in Q1, is that just an orangey too or and something more than that? And last one on GaN. Can you help us understand that your GaN orders aren't just concentrated on one Taiwanese player and there's actually a broadening happening as you claimed in your orders. Maybe if you give us, how many customers in GaN are double digit type customers in 2022 versus 2021? And to kind of help us understand that broadening of adoption of GaN, that’ll be helpful. Thank you.

So I got your first and third question. Let me answer them. And then I would like to ask you to get your second one again, I didn't get that. So let me answer your first and third question first. Yeah. So the first question I took on the Micro LED, the capacity ramp built out which I mentioned is happening in ’23 and ’24 and we see and we get plans for multiple customers to build out their capacity. The plans of individual customers, some are very concrete and very definite and other customers give us indications and ask us to take reservations, but I’m not so definite yet. However, I can -- we can clearly see and comment that the market is moving in this direction. And we can clearly see that towards the beginning or end of ’22, beginning of ’23 and the starting point will happen. I can also clearly say that in the end, it will be multiple customers, yeah? And what I cannot say is which customer is happening at what place. But the overall direction and dimension is that in ’23/’24 the Micro LED capacity build out is happening and it's happening with not only one customer but multiple customers. Then let me come to your third question. We definitely see on gallium nitride, that the market is broadening. We do not only see the order of concentrated around one large customer or two large customers, as your question is indicating. We see customers across the board ordering. We have a couple of large customers, each of them expanding and broadening their facilities, some of them ordering, three, four tools and others ordering eight, nine, ten, tools. And we see new customers coming, new entrants, new startups, and some startups equipped with significant financial means or some companies, part of the global semiconductor value chain entering this market equipped with a lot of expertise, a lot of financial means, a good network entering this market and building out factories. I think it's a very broad movement that is happening on global scale. It's not only concentrated on one region, it's globally. And as I indicated in my introductory words, it is broadening across many applications, there is some 650 world customers, there are some 100 world customers, some still addressing some consumer electronics, others going in industrial applications like data centers and communication base stations, other going into white goods and electric drives. So this is a very broad momentum that we see. David O'Connor: That’s very helpful and thanks for that additional color. Just to specify my other question and it was around kind of the lead of your primary Micro LED customer versus others. And do you think in the terms of the development stage that is one year, two years, just to give us a sense of, of the time delta between those customers in terms of Micro LED development? Thank you.

So I think I wanted to say that we see in Micro LED the overall market is starting around ’23. We see one customer with very concrete plans. I would not necessarily say that the others are behind by like six months or 12 months, yeah, in terms of like a time gap. I think it's simply the point that we see very concrete plans on one side, and maybe not so concrete plans on the other side. David O'Connor: That's really helpful. Thanks so much.

And the next question comes from Jürgen Wagner from Stifel Europe. Please go ahead. Jürgen Wagner: Yeah, good afternoon. Thank you for letting me on. In your handout you mentioned some of your competitors and whom are you seeing currently as the most serious in GaN Power? And going forward, also for Micro LED? And on your strategy, at what point would you consider M&A’s to be needed to broaden your portfolio? Thank you.

Thank you very much. I think in GaN Power, our toughest competitor is silicon. So we really see, as I mentioned with my previous answer, that the market is currently broadening across all applications. Today, gallium nitride has only taken 5% of the total market. So there is still 95% to get. And the industry is clearly zooming in on replacing silicon in as many applications as possible. And that's the momentum I was describing on the earlier question before. Nevertheless, of course, silicon strikes back. Yeah, so silicon is also improving but I would clearly see our toughest competitor to be silicon. Because in the end, it's our clear ambition, we want to have not 5%, we want to have 50% of this market or more, yeah, taking it away from silicon. And for that one, we are working on continually improving the productivity of our tools, the performance, the uniformity yield particles, everything that is improving to optimize the yield and so that then we reach cost positions that allow us not only to get a good share in some specialty applications, but really to attack silicon on a very broad scale and volume. Yeah, that's our plan for the gallium nitride power. With that, I come to the second part on the M&A, we see ourselves very well equipped with our technology portfolio to realize that ambitious target that I'm formulating Nevertheless, M&A also has to do with opportunities. Yeah, if something comes along, we are definitely open for that. But it's not that we have a gap, a portfolio gap or so that we need to close. So we keep our eyes open for opportunities. Also, always innovation is happening and additional opportunities are coming along. And we are scanning them and when there is one, we will for sure, make sure that we don't miss out on that. Jürgen Wagner: Okay, thank you.

The next question comes from Charlotte Friedrichs from Berenberg. Please go ahead.

Thank you. Just one question left on my side. And could you maybe talk a little bit about your pricing expectations for this year, and also into the coming years in the context of the new tool generations coming through? And lastly, also the cost increases that you face in some areas? Thank you.

Thank you, very clear. So we see some, however, moderate cost increases if we look at our overall supply chain. Of course, it varies by individual module or component. But overall, the effect is still relatively moderate and we're able to fully pass that on to our customers, because we compete on technology, on performance and not on price, that's very clear. So we do not, we are not afraid to put that out very clearly. We are not afraid, we are not scared, or we do not expect a margin cost -- negative cost margin effect due to the inflationary environment. But that’s just upfront. Now I come to the new tool generation. The new tool generation, as discussed earlier, is offering considerable benefits to the customers be it for some of the products in terms of the higher productivity, be it for some of the products in terms of, let me say, the ingredients for improved yield, like uniformity and particles. And we are able to share some of these additional benefits with our customers by realizing moderately higher prices. So part of the benefit goes to our customer, part of the benefit goes to us, then, in terms of a better margin. I think that that's the overall gain. So I would expect that over the next three years, as we are gradually rolling out the new generation of tools, it will be a very slow, a very gradual replacement and we will see the impact on margins. Why do I say a gradual replacement? We all know in the semiconductor industry that when a tool is qualified, this qualified tool is designed in and it stays, and you need to re-qualify with all your customers to switch the tools, which by the way, is a very good barrier to entry. But also its protecting our market position, so overall this is a good thing for us. But it comes along with the fact that our new generation and existing applications is penetrating step by step. Well, of course, in new applications, the tool, new tool generation can enter very rapidly. Yeah, so application by application, we will see very different speed of adoption.

Thank you. And then as a follow up, is it possible to quantify the productivity advantages, etc., for your customers with the new tool generation?

That really varies by product and by application. We do that, of course, in very detailed discussions with our customers in order to show them the benefits of the tool. However, that really depends on each application quite, quite detailed. And I think it and also I think in the end, you're trying to look at what would it mean, overall, for the margin? I think it's a bit too early to quantify that.

Okay, thanks.

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

Good afternoon. And the first question is on the service and spare part revenues, the €22 million in the quarter, I think it was about double the volume of the previous year's Q1. So what's the expectation going forward? I mean, is that level sustainable or will that come down a bit again?

It will come down. We had some special effects this quarter. Good observation. And I think we have given an indication for the full year, and we will stay very much in line with that one.

Okay, good. Then on GaN Power, it wasn't that long ago that I think you shared your expectation that the markets, tool markets will amount to about [70] tools per annum. And as the market is pretty dynamic, do you stick to that assumption or has anything made -- changed your mind in that respect?

Very good question. The first of all that unit is safe, there could be an upside to that. But I don't have recent data. So I would not want to quantify it for you right now.

Yeah. Okay, fair enough. Last quick one, on the R&D level, you mentioned €60 million to €65 million target for this year, as you have probably a lot of qualification expenses [indiscernible], but also the volume, one should expect then going forward in future years and the years to come. Was there an opportunity that’s kind of kicking?

So I would expect the R&D level to stay or the R&D expenses to stay on that level. In this year, as mentioned, we have the qualification and the efforts to complete and to finalize the new series, the new generations, which we were speaking about. Nevertheless, we see overall, our revenue basis broadening across these multiple application. We see these multiple applications, all of them going into the ramp. And typically when an application goes into the ramp, our customers are then asking for further improvements and for further productivity increases. And very clear also, we ourselves have the ambition to stay in this strong market position when the volume continues. And in order to take into continue having a leading position, we also need to continually improve our products. And you see now, if you look back five years, we were very strong, and our revenue was mostly derived by optoelectronics and lasers. Now we really talk, of course, continuing with the lasers, then also the Micro LED in multiple color. Yeah, this is multiple products, but then the silicon carbide, then the gallium nitride power and the gallium nitride RF. So you see that we have really broadened from essentially one revenue carrying product lines, you could say now to five or six, depending on how you count and how you split it. And you can imagine that maintaining five or six and continuing to support customers with innovation, and to stay ahead of competition, you will continually need to invest in each of these different products.

Yep, understood. Okay, many thanks.

But I can also, I think we can clearly say as a percentage of revenues, the R&D will not grow. But it will rather shrink because we clearly expect the revenue to be growing faster than the R&D expenses. I think that's a very important message.

Yeah, okay.

And the next question comes from Sean [McMullen] from GMS Invest. Please go ahead.

Yes, thank you for taking my questions. And I have to come back to the gross margin, I think it was fairly strong in Q1. You hinted at Q2, the gross margin might be a bit lower, because of the red LED order. So there's obviously a mix effect playing into that but the absolute sales level obviously also plays an important role. And I was wondering, was the mix effect in Q1 particularly good? Or was it kind of a -- if one can say it, kind of a standard mix of products sold? Or maybe if you can elaborate a little bit on this, because the 41% guidance for the years seem kind of low if you already have 40.6%, with just not even €90 million in sales?

Yeah, I take that, Christian here. The major driver for the gross margin is for sure the product mix, which can deviate as we have explained and fairly well known. The operating leverage within the gross margin is limited with a very flexible model. We don't do the manufacturing ourselves. So the overall gross margin is not so much driven by the overall volume levels here, but primarily product mix. You have some US dollar effects in there, that's the primary driver. Just this is not any different than in the past.

Sure, but the mix, I would assume, if at all, should only improve going into Q3 and Q4 at least I mean, and there we also have to have a sales levels?

Exactly. So that is what we’re communicating that the overall gross margin guidance for the year is fully secured. As we expect higher gross margins then in Q3, and also in Q4.

I'm also asking because I mean, I look back at last year, and I mean, obviously you had several guidance increases on the top line on the EBIT margins, etc. But up to the 4th of November, you left the gross margin guidance unchanged at 40% and the actual margin was at 42.3%. So?

Yeah, we had a strong, if you go back to the last year, especially in Q4, it was a strong US dollar effect that was difficult to anticipate because it was driven by the latest US dollar development in the end of the year, that was difficult to anticipate that was the major driver there.

No.

Exactly, that was a buildup. But I think in the last year, we had a special effect that I think roughly 40% or 35% or 40% of the revenue was shipped in the Q4. So that was a big driver. And then in this strong quarter, we had the big effect on the US dollar. That was the reason for this big surprise.

Okay. And then just purely financial. I noticed depreciation was very low at around €2 million lower than in Q1 last year. Also, I mean, it swings about a little. I mean also last year, not every quarter was the same, but it seems fairly low also given the fact that you had a bit of, let’s say increased CapEx spend in the last two years, I would have expected that number to go up. Can you tell us a little bit about what you expect there in the quarters to come or do you have an anticipation of what it will be for the full year?

Not in particular. I mean, of course, our CapEx is expanding to some degree, but that is primarily driven by investments in our lab infrastructure, lab tools to expand our capacity to run customer demos, qualification, supporting R&D going forward. That's the primary driver on CapEx. CapEx is not very much driven by volume ramp, as all of the manufacturing is outsourced. So that is not a major driver in for CapEx and subsequently for depreciation.

Yeah, but the €2 million seem low, right? I mean, it was €1.97 million depreciation for the quarter. I know, that’s not a big number, but --

Well, yeah, I mean, our depreciation will, to some degree go up with the slightly increased CapEx going forward.

Exactly.

But not a major -- not a major effect to the mix.

Okay. Thank you very much.

And the last question comes from Johannes Ries from Apus Capital. Please go ahead.

Yes, good afternoon. Still some questions left. First, can you maybe elaborate again on US dollar impact maybe of your figures, because especially in April, we have seen real strength of the US dollar against the euro and it seems that we're going looking to the interest rate increase in the US, the difference were maybe even widening, so maybe a good chance since US dollar gets even stronger.

Yeah, of course. As you know, we base our guidance on the rate of 1.2 USD/EUR for the full year. We’ve see seen a positive effect in Q1 that is between two to three percentage points in our gross margin versus the bucket rate. Overall, as we have communicated also the last time in our last call, we expect over the full year, around 30% to 40% of our sales in US dollars. So you can run your simulation, then what that could mean on gross margin and also EBIT margin, depending on the anticipated US dollar development. Yeah.

Very clear, thanks. Maybe another question on your lead time, what is the average lead times or maybe what is the latest time you can get orders which could get revenues this year?

Yeah, so I think, first of all, I mentioned we are fully on track with respect to our revenue guidance. I think that's a very important message, fully on track. Yeah. Typically, the lead time we are experiencing is these days, between 9 months to 12 months. It depends a bit on the product and the application. So this is up from the past but that is also reflecting that we have a very strong pipeline.

And maybe on the orders for Micro LED, if there's one concrete customer project, now ramps will the [indiscernible] orders has been in this year or next year you will receive?

I think I think it would be split over time. And I think the ramp will start, as mentioned towards the end of this year or early next year. So for sure, we will see orders for that one in this year. And then, you know, for larger capacity built out, capacity built out it's happening over several quarters step by step. So I think part of the orders we will also see in the next year.

Okay. Maybe a little bit longer term view maybe not only, so watches are maybe using Micro LED, more and more broader usage, maybe up to smartphones, so there's a good chance that Micro LED will be the largest market, larger sensor GaN market?

Again, I think that's a very difficult question, because it relates to many factors. First of all, the timing, but then also the pixel size, yeah, how many smartphones or how many smartwatches or televisions can you make out of one wafer? But for sure, we expect that the Micro LED market will be one of our very big markets and will very kind of significantly contribute to our revenues. And overall, we were seeing really across the board, the whole industry, both from the display makers, from the large consumer electronics players, semiconductor players to be investing in research and development on many, many, many projects around the globe that we are aware of, and that we are part of.

Great. Maybe a more general question was power SMEs , given the situation, now we have coming from this big disaster of Ukraine war and therefore the pressure may be to improve on the energy side even to be much more energy efficient. So that's one of the three ways maybe we can solve this problem. Do you see a perfect acceleration of the use of compound semiconductors like GaN or SiC?

I think we are seeing across Europe overall an acceleration of the shift towards electrification and new energies. I think this is a broad move that we can see. And as part of this overall shift, I think we will see a much accelerated electrification of transportation. And I would not be surprised if also at some point there is regulations coming, driving further policy statements of policy making that drive energy efficiency. I think that's part of this overall trend that we are in. Yeah, however, we have not seen any concrete orders linked to this specific situation now.

It's too early, maybe, but maybe in the next quarters, or maybe in a year, so it could be the case.

I think it could lead to an acceleration of the mega trend that anyway this is ongoing and already we are part of.

Maybe final question on the leverage, you said you have not a big gross margin leverage. But how is the mix maybe if now, GaN is growing fast, SiC is growing fast, even so Micro LEDs is, if I understand you right, you said, could have a positive mix effects may be going forward on the gross margin, and how strong is OpEx leverage going forward? Maybe if you're further growing, you said already R&D will be growing less in the top line. I think SG&A also how strong good could be this leverage in the model going forward?

I take that our operating leverage is actually very strong. So the gross margin is primarily driven by product mix. So with the new generation products coming to the market, as Felix explained over the next years, gradually, but when they come they will in tendency drive gross margin up. As explained, we share that additional value with our customers but you can expect them increasing gross margin going forward. Then, of course, the gross margin absolute is driven by the overall volume that is being shipped. And all of our variable costs is in the gross margin. On the OpEx side, as we also explained, SG&A, we expect to remain fairly flat. The R&D expenses to increase over the next quarters but also then remain on about that level, so all of that additional gross margin to the largest degree hits the EBIT margin, leading to a very strong operational leverage effect on the EBIT margin.

Great. Sounds very promising for the future. Thanks a lot.

Okay, thank you.

So we have no, sorry.

Yeah, yeah, I can take that. Thank you very much to everyone listening and asking questions. With this, I'd like to conclude today's call. As I said, thank you for attending. Please note that we will hold our virtual Annual General Meeting on May 25. And we would very much appreciate your support for the agenda items proposed. Please all stay safe, hopefully see some of you in person again soon. Bye-bye. Thank you.