AIXTRON SE (AIXA), a leading provider of deposition equipment to the semiconductor industry, reported its H1 2024 results, demonstrating resilience in a challenging market environment. The company announced strong orders totaling EUR 176 million in Q2 2024, predominantly driven by power electronics. Revenues for the quarter reached EUR 172 million with a solid gross margin of 37%.
AIXTRON's strategic expansion in the silicon carbide sector has yielded new customers and significant follow-up orders, pushing the equipment order backlog to EUR 401 million. Despite a softer market for power devices, the company revised its full-year 2024 guidance to expected revenues of EUR 620 million to EUR 660 million, with a gross margin between 43% and 45% and an EBIT margin of 22% to 25%.
AIXTRON's operational cash flow has improved, and a new revolving credit facility of EUR 200 million has been established to enhance financial flexibility. The company's G10 tool family is anticipated to contribute about 50% of its equipment revenue in 2024, with stable demand in the optoelectronic market, particularly from datacom and telecom sectors.
Key Takeaways
- AIXTRON reported Q2 2024 orders of EUR 176 million, revenues of EUR 172 million, and a gross margin of 37%.
- The company's equipment order backlog has increased to EUR 401 million.
- AIXTRON adjusted its full-year 2024 revenue guidance to EUR 620 million to EUR 660 million, with a gross margin of 43% to 45% and an EBIT margin of 22% to 25%.
- The G10 tool family is expected to generate about 50% of the company's equipment revenue in 2024.
- AIXTRON sees ongoing opportunities in the GaN power electronics market and anticipates GaN adoption for AI power delivery starting in 2026.
Company Outlook
- AIXTRON expects Q3 2024 revenues to be between EUR 150 million and EUR 180 million.
- Anticipates returning to normal inventory levels by mid-2025, targeting 60% to 70% of order backlog.
- Ongoing upgrades for G10-SiC tools are underway, with costs borne by customers, positively impacting AIXTRON's profit and loss statement.
Bearish Highlights
- Acknowledged margin dilution due to the traditional red LED segment.
- Noted market uncertainties in China, which may affect the sustainability of the LED and microLED businesses.
Bullish Highlights
- Secured new customers and major follow-up orders in the silicon carbide space.
- Anticipates high double-digit EUR million revenues from both traditional red LED and microLED markets in fiscal year 2024.
- The acquisition of a production site in Turin, Italy, is expected to generate significant additional revenue over time.
Misses
- Due to the softer end market for power devices, AIXTRON adjusted its fiscal year 2024 guidance.
Q&A Highlights
- Addressed the ramp-up costs and potential drag on margins for the new Turin facility, emphasizing low initial investment and efficient operations.
- Highlighted the importance of cost control and resource allocation for future volume spikes.
AIXTRON's strategic investments and market positioning have allowed the company to navigate a softer market with confidence, as evidenced by its strong order backlog and anticipated revenue contributions from the G10 tool family.
The company's focus on power electronics and expansion in the silicon carbide market are poised to drive future growth, despite the current market headwinds and uncertainties in China. With improved operational cash flow and a new credit facility, AIXTRON is well-prepared to meet the expected increase in demand and continue its trajectory in the semiconductor equipment industry.
Full transcript - AIXTRON SE (AIXAd) Q2 2024:
Operator: Good afternoon, ladies and gentlemen. And a warm welcome to the H1 2024 Results Call of AIXTRON SE. At this time, all participants have been placed on a listen only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Christian Ludwig.
Christian Ludwig: Thank you, Anna. Welcome to AIXTRON's H1 2024 results call. Let me quickly introduce myself. My name is Christian Ludwig, I’m new Head of IR at AIXTRON since May 1st. So this is my first earnings call for AIXTRON. I have met or at least talked to many of you already in my first month and looking forward to meet the rest of you as well soon. Now, I'd like to welcome our CEO, Dr. Felix Grawert; and our CFO, Christian Danninger, who will guide you through today's presentation and then take your questions. 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 take note of the disclaimer that you find on Page 2 of the presentation document as it applies throughout the conference call. This call is not being immediately presented by webcast or any other medium. However, we will place a transcript on our Web site at some point after the call. And now without much further ado, I would like to hand you over to our CEO for his opening remarks. Felix, the floor is yours.
Felix Grawert: Thank you, Christian. Great to have you on board now. Let me also welcome you all to our Q2 '24 results presentation. I will start with an overview of the highlights of the quarter and then hand over to our CFO, Christian, for more details on the financial figures. Finally, I will give you an update on the development of our business and on our guidance. Let me start by giving you an update on the key business developments of the second quarter on Slide 2. The most important messages for today from my viewpoint are, despite an overall softer market environment, we have maintained our competitive position and we could recognize strong orders in second quarter '24 with EUR176 million mostly driven by power electronics. We concluded the quarter with revenues of EUR172 million in the upper half of the guided range. The gross margin came out as expected at 37%, which is lower compared to the previous year due to a product mix comprising a larger share of lower margin LED tools. Most interestingly, we could further expand our strong position in silicon carbide. In Q2, SiC based system accounted for 57% of the incoming equipment order, while gallium nitride based system made up 29%. Our market position in silicon carbide has been strengthened throughout the last two quarters with new customer wins. We were able to win an additional top five player in SiC. Furthermore, we have secured a substantial volume order from China and we could win several new customers for our G10-SiC tool, amongst several from Japan. You may also have seen our recent press release together with Nexperia for a G10-SiC repeat order and new G10-GaN order. This is the result of the recent technical progress we have made with the G10-SiC. So while important new SiC customers drove the business in the first quarter, in the second quarter of this year, we have also secured major follow-up orders from existing SiC as well as gallium nitride customers. Mostly driven by Power Electronics, our equipment order backlog at the end of Q2 increased to EUR401 million, up almost EUR50 million from the year end of fiscal 2023. In June, we further announced the acquisition of a production site in Turin, Italy. This addition to our manufacturing footprint addresses the expected increase in demand from major customers and we'll be able to cover future order peaks at all times. Furthermore, this gives us better access to the strong manufacturing ecosystem in Northern Italy. The softer end market for power devices has impacted our delivery schedule. Customers are continuing to place orders but delivery pushed out in some cases. Therefore, we have adjusted our fiscal year '24 guidance. We now expect revenues in the range of EUR620 million to EUR660 million with a gross margin of 43% to 45% and an EBIT margin of 22% to 25%. Christian will now provide a more detailed look into the financials, and then I will take over with an update on the market. Christian?
Christian Danninger: Thanks, Felix, and hello to everyone. Let me start with the financial highlights of our income statement on Slide 4. We had good quarter in a difficult market environment with revenues at EUR132 million compared to EUR174 million last year. This is due to the fact that in the last year some shipments and revenues had been pushed from Q1 to Q2. In the first half of 2024, we recorded revenues of EUR250 million, which were exactly in line with last year's H1 revenue number. Gross profit in Q2 of 2024 was at EUR49 million and EBIT for the quarter was at EUR30 million. The gross margin was at 37% compared to 42% in the year before, both in Q2 as well as H1, driven primarily by product mix. In both Q1 and Q2, we shipped a larger share of old generation systems like G4 and G5 compared to last year. These systems come with lower margins than the new G10 generation. Especially in Q2, we shipped a larger share of LED tools, which come at a lower margin. To be clear, these effects were expected and are baked into our full year expectation. OpEx in the quarter went up to EUR36 million, predominantly driven by higher R&D spending compared to the previous year. We are currently finalizing the development work for the G10 series while we have started the development of our next generation systems already. As we said earlier, we will see an increase of R&D expenses in 2024 by mid single digit million euro number compared to 2023. In 2025, we target R&D spending again around the level we have seen in 2023 in absolute terms. SG&A will remain flat in 2024. Now to our key balance sheet indicators on Slide 5. We've seen a further slight increase in inventories to EUR448 million compared to EUR436 million at the end of Q1. Referring to our last results calls, the high inventory levels are still the result of our strategy to load the supply chain early enough to secure on time delivery of our products, despite tight supply chains. As we saw the supply chains are overall relaxing, we adjusted our strategy and are on the way to reduce buffer stocks. For 2024, though, we had prepared inventories to secure the initial full guidance range, including the upper point. When we saw that 2024 is coming in softer, we further decided to slow down the supply chain, but some orders were so far progressed that we decided to take delivery, leading to this further small increase in inventories. But this should now be the high watermark and we expect a reduction of inventory levels with the effects kicking in, in the second half of 2024 when the larger shipments are planned and some effects will take until summer 2025 to materialize in full. Trade receivables at the end of June were at EUR117 million compared to EUR158 million at the end of 2023 and flat versus the number end of March. The improvement versus year end 2023 was mainly a result of the collection of the payments related to the large shipments in the last quarter of 2023. The advanced payments received from customers at quarter end were EUR133 million, representing about 33% of order backlog, very much like in the last quarter. Now moving on to our key cash flow indicators on Slide 6. Our operating cash flow improved strongly, both in Q2 as well as H1 as the inventory build stabilized. After six months, operating cash flow stood at EUR13 million, an improvement of EUR80 million versus last year's minus EUR71 million. In the second quarter, we generated EUR20 million of operating cash flow, a swing of EUR96 million versus last year's minus EUR76 million. Free cash flow also improved on the back of improvement in operating cash flow. In the first half, it came in at minus EUR56 million compared to minus EUR80 million last year. The improvement was less pronounced than for the operating cash flow as our CapEx in H1 at EUR69 million was significantly higher than last year's number of EUR10 million. This is primarily due to the investment into the innovation center as well as the investment in our new Italian facility. In summary, we will see a turning of inventories in the second half of the year when the larger shipments are planned, which should result in an improved operating cash flow. At the same time, CapEx will come down in the second half of the year as we approach the completion of the innovation center. These two effects should result in a strong free cash flow in the second half of the year. Our cash balance, including our current financial assets as of June 30th, decreased to EUR79 million from EUR182 million at the end of 2023. This reduction was mainly due to the mentioned CapEx project and our dividend payment of EUR45 million in May. After Q2, we have signed and closed a revolving credit facility for EUR200 million to further strengthen our financial flexibility. These facilities are available for all purposes. With that, let me hand you back over to Felix.
Felix Grawert: Thank you, Christian. Before giving you some more details on our adjusted guidance for '24, I would like to continue on Slide 7 and give you an update on our views on the different end markets. With our G10 tool family introduced in the market since September '22, we have a state-of-the-art product offering that offers the best in class cost of ownership. With the G10 family, we cover all our key end markets while we have exciting growth applications ahead of them. Overall, we are very pleased with the market traction of our G10 series. We expect that the G10 family will make about 50% of our equipment revenue in the full year '24. This is a very strong adoption roughly one year after launch, given the required qualification cycle in all applications we address. This confirms that our strong focus on technology and innovation is paying off. We aspire to continue this strategy in the years to come. On Slide 8, you can see which tool addresses which application. Let me briefly touch the optoelectronic area where we see stable demand, which is driven by datacom and telecom lever. Datacom lever is critical to data center to meet the higher demand of AI workload, both for intra-datacenter and datacenter interconnect requirements. We maintain a clear number one position in the laser market with a strong market share, and we are very well prepared with the G10-AsP to secure this position. Now to the LED and micro-LED markets. As stated in the Q1 call, in ‘24, we see a wave of investment into traditional red LED capacities ongoing. We expect high double digit EUR million revenues in fiscal '24 from this market. What we see happening is that players, which have been traditionally only serving blue LED, are now investing into red capacity as well. Our G4 is here the tool of record in this segment due to its track record. On micro-LED, where the G10-AsP is the tool of record, the industry continues to work on micro-LED technology despite the news from Apple (NASDAQ:AAPL) and AMS AIXTRON in Q1. Micro-LED revenues for fiscal 2024 are expected to be at high double digit EUR million, driven by several customers building R&D and pilot production lines to commercialize the technology. The manufacturing of micro-LEDs is challenging, particularly the mass transfer aspect. This makes timing predictions difficult but multiple customers have confirmed their continued interest. Let me continue in more details with the GaN power electronics market on Slide 8. There have been some exciting developments lately that I would like to share. We see the market accelerating, fueled by more and more applications and provide you an update as we realize that market analysts capture most but not all trends, especially the future developments in this application appear not to be well understood until now, and we believe that they are important for you to understand our recent strategic moves, such as the investment in our Italy location. The Slide 9 depicts the deployment of our GaN power technology application-by-application. We have bordered them by voltage class on the Y axis and by time of market adoption on the X axis. Please recognize that these specifications are approximate and don't aspire for precision. You may recognize a number of past developments that have driven GaN volumes in the past and that we have discussed in this place. In 2019-2020, the first wave of products were fast chargers for consumer applications, such as smartphones and also notebook power supplies. 650 volts was the first voltage to get large market traction. The first generation of GaN products by most players was on 650 volts. The high voltage, high power AC-to-DC power converter used, for example, in datacenters, were the next application, which continues to grow in volume even today. And a derivative of that were Class-D audio devices, which some of you may be enjoying at home. Most recently, we've seen the emergence of low voltage GaN products, such as 100-volt and 200-volt products. Initially pioneered by smaller players, these products now have become part of the portfolio of most of the big GaN players. This comprises DC-to-DC power stages, datacenters but also in automotive, solar panel inverters and specialty devices, such as wireless chargers and LiDAR applications. The most important volume driver here is probably the usage of GaN in low voltage motor drive, also called BLDC, be it in battery tools, battery driven consumer applications or in low speed electric vehicle. This is a huge market, which might be [indiscernible] larger than the high voltage market from my estimation. Most recently, we have seen GaN devices emerge for high voltage motor drives. Texas Instruments (NASDAQ:TXN) launched in June of this year at the PCIM Power Electronics Trade Show a three phase 250 watt power inverter. With such devices, you can massively boost the energy efficiency of home appliances. And we all know that efficiency has become one of the key selling points in white goods. Furthermore, we see gradual adoption of GaN in electric vehicle on-board charger, in short, OBC. Here, gallium nitride competes with silicon carbide and with traditional silicon power devices, but it has benefits when it comes to bidirectional charging. Overall, we can say that GaN is set to replace silicon application-by-application and step-by-step. Many of these applications, but not all, are captured by market analysts. What is not fully captured yet is the market predictions and market predictions by analysts, in our view, is the next and upcoming wave of GaN application. The most exciting are GaN power delivery for AI chip and highest voltage GaN at 1,200 volts for electric vehicles main inverters. Turn to Page 10. Let us have a look at GaN power delivery for AI chips. You all know that one of the biggest challenges for AI is the energy consumption. The power consumption of NVIDIA (NASDAQ:NVDA) AI chips is growing by a factor of three from 2020 to 2025. A recent study published by the German business newspaper, Handelsblatt, expects global power consumption driven by AI to grow from about 40 terawatt hours in '23 to about 140 terawatt hours by '28. This is in five years or 30% CAGR per year. At the recent IMEC Technology Forum this year, Lisa Su showed the power consumption needed to train the next generation of LLM, which equated to the power output of an entire nuclear power plant, quite big number. In short, the industry must address the power consumption of AI chips to enable the continued evolution of this technology. We can and we will contribute with GaN for power delivery to address this challenge. Throughout the next generation of AI GPUs, GaN switches will gradually be deployed in the conversion chain from the wall plug at 240-volts to the individual CPU and transistor at 1-volt. The conversion and distribution across the chip occurs in multiple steps, first down to 48-volts, then 12-volts and then finally to 1-volt where the individual transistor is sitting. In all these conversions, you have silicon power devices today and they are all set to be replaced by gallium nitride chips in the future to increase the conversion efficiency. This is particularly interesting because the dye size increases with current. In an oversimplified manner, you might say that for a 1,000 watt power supply or power, you might need four to five switches of 1 amp to carry the load at 240-volts. But close to the individual CPU and the individual transistor, you might need thousand switches of 1 amp to carry the same load, and because at 1 volt, 1 volt is the voltage used within the chip. This is not precisely the math but it serves you to illustrate the idea that the further you go down in voltage, the more twitches you need and the more dye size you need. We expect this growth opportunity to kick in '26 or '27 onwards with gallium nitride. The other trend that we would like to bring on your radar today is the usage of GaN in very high voltage application on the other side of the spectrum. We have illustrated this at Page 11. Until today, these applications were exclusively served by silicon IGBTs and silicon carbide MOSFETs. Now gallium nitride has also achieved breakdown voltages of 1,200 volts, which you see on the left. Multiple customers are working on GaN technology for the electric vehicle main inverter, also in collaboration with power OEM. In this application, gallium nitride takes on the direct competition with silicon carbide. Those players who focus on GaN for highest voltage assume that gallium nitride will realize a steeper cost down curve compared to silicon carbide and eventually be the more cost competitive solution. This trend would be beneficial for AIXTRON because in silicon carbide the substrate makes up a big part of the cost, while in gallium nitride the EPI takes the largest share. We don't know today how this race will eventually turn out, but we are preparing for it in terms of potential volume upside. When the wave comes, we are ready to catch it and we want to address the resulting customer demand. Hence, overall, we see ourselves very well positioned with our G10-GaN to address these applications and the resulting requirement of our customers, be it in terms of technology or in terms of high volume manufacturing capabilities. With that, let me now turn to our view on the current silicon carbide market dynamics. We observe that, at this point in time, the overall market worldwide has built more capacity than there is demand. Nevertheless, we and our customers remain very positive about the mid-to-long term outlook. The electric vehicle market will continue to grow, driven not only by regulatory demand but much more importantly by better product offerings. In segments where the car offering is attractive, the EV adoption is currently increasing. We will see and we expect more and more cars with next generation battery technology coming to the market, offering lower cost and better range, and all this also requires silicon carbide inverter. Furthermore, the situation at each of our customers varies strongly. Despite the overall market slowdown, the volume ramp of a number of larger players continues, while smaller players appear to be consolidating or slow down significantly compared to their initial plans. We had anticipated increasing cost pressure and commoditization in silicon carbide market right from the beginning and our expectations are now being confirmed. This trend increases the focus on cost per wafer, which plays to the strength of our product. The G10-SiC has established itself as the most productive tool in the market, meeting the required technical specification and offering the lowest cost per wafer. We maintain a clear number one position with a growing market share. Our very strong silicon carbide order booked in Q2 are the best evidence for our view on the market and our competitive position. As I said the last time, money talks. Now let me move on to our infrastructure investments, which we have made in light of the expected market developments that we outlined just before. In June, we announced the purchase of a new site near Turin, Italy. An existing building was acquired for a single digit million euro investment. Including the facility investment, total spend will initially be a low double digit million euro figure. This will allow us to rapidly expand our production capacity up to a potential twofold increase of manufacturing volume in the future. Such increase would require further investment in infrastructure of the facility and hiring of additional staff. With this, we are strategically preparing ourselves for the future, which I just described in Power Electronics. The Turin side especially gives us the flexibility to address the expected increases in demand from major customers, and it will be able to cover future order peaks at all times. Finally, in May of last year, we've announced that we will be expanding our facility at our headquarters in Herzogenrath, Germany with the new innovation center. This is adding about thousand square meters of cleanroom space to our R&D operation. It will allow us a much deeper collaboration and co-development with our customers. The construction is progressing well. We expect to move our first system into the innovation center as planned in the second half of the year. With this, let me now give you an update on our adjusted full year guidance for the year. As stated before, the stated significant amount of orders received in Q2 is already for shipment next year. Hence, we have adjusted our guidance for '24 as follows. We expect total revenues in the range between EUR620 million and EUR660 million from before EUR630 million to EUR720 million. We expect a gross margin in the range of 43% to 45%, which is unchanged. And we expect EBIT margin in the range of 22% to 25% from before 24% to 26%. Our revenue guidance for the subsequent quarter is as follows. For Q3 '24, we expect revenues between EUR150 million and EUR180 million. While production plans will be quite balanced between Q3 and Q4, shipments will be more Q4 heavy based on customer plans to take delivery of the system, which are mostly derived from customers' set completion dates. We have seen this in the last year so nothing new here. And with that, I'll pass it back to Christian before we take questions. Christian?
Christian Ludwig: Thank you very much, Felix. Thank you, Christian. Anna, we are now ready to take the questions.
Operator: [Operator Instructions] The first question comes from Martin Marandon of ODDO BHF.
Martin Marandon: My first question maybe is on the order momentum. Can you maybe comment what you said a few weeks ago, meaning that you expect similar kind of orders the next few quarters, is it reiterated? And I have a follow-up.
Felix Grawert: When I made that statement, and I can reconfirm that statement today. We looked at our pipeline and the discussions we currently have with customers. The pipeline is quite strong. We have ideas when some of the customers want to have the tools. We know our lead times. And based on all these factors, we have given out our expectation that the momentum in the Q3 '24 and also the Q4 '24 will be somewhere on the level of what we've seen in the second quarter. And it was important to us to give that message to really show you that the second quarter is not just a one off and then afterwards, it goes down, but we clearly expect Q3 and Q4 to be on the same level.
Martin Marandon: And maybe now a question on GaN, since you talked a lot about it during the presentation. What is your visibility on GaN adoption for AI power delivery? Meaning that can you help us understand all the cycle between qualification and adoption, how long does it take before the chip is being qualified, and you have some idea of when GaN will be really adopted in massive adoption in AI?
Felix Grawert: You asked the million dollar question. So we put in the presentation that's the best guess we have as of now that this is going to start in 2026 onwards, so to say, than a trend ramping up in volume. Again, a lot of this happens at our customers who use our tools, the G10 or some of the older generations. But to say to do this so not everything is transparent to us but that's the best guess we can give. And we all know that the energy consumption is a very pressing point to the industry. So we see that there's a big demand, a big need. And I think everybody is now running as fast as they can, and this year '26 is our best estimate, '26 onwards [Multiple Speakers] starting in '24 and then in the following year to draw volume.
Martin Marandon: Maybe the last one, if I may, on the laser business. How do all the innovation we are seeing today on photonic and 3D integration of photonic ICs directly on the packaging translate into demand for AIXTRON laser business? I mean, what I'm trying to understand is that, does that necessarily mean that laser demand will be structurally higher compared when the photonic is not on the packaging?
Felix Grawert: So what we do see is overall that the data volume is -- continues to exponentially grow. Again, lasers and optical data communication can be one factor contributing to the energy challenge of AI, not to the compute within the chip for sure, but to the compute from one card to another card, for the data transfer within data center but also from data center to data center. So we expect overall an increase in demand. Now how exactly that plays out with multiple and various architectures being currently being discussed, the question you raised, we don't have full transparency on that one yet. As soon as we have transparency, I'm very happy to provide an update here in this place.
Operator: The next question comes from Olivia Honychurch of Jefferies.
Olivia Honychurch: My first is on the 2025 outlook. Now that, we're at the half point in the year, it feels like a good time to be checking in on where you're seeing 2025 growth versus what you guided for us at the FY24 results in February. Back then you said that you're expecting strong growth in revenues in 2025. And given that since then you've downgraded your 2024 guidance because of some shipments pushing out of this year and into 2025. Can we therefore assume that the growth outlook for next year hasn't been stronger than what it was as those shipments switch from this year to next? And then I have a follow-up.
Felix Grawert: Honestly, it's a bit too early, given the dynamics in the market, to comment now reliably on '25. I think a lot is currently in dynamic and changing. Just look what today's day has brought to the market. I would want to wait a little bit before providing indications to '25. What I can tell you is and what we have already outlined here is that we do see, especially in silicon carbide, some of our large customers continue to invest through the cycle with a clear ambition to have factories up and running, capacities not only installed but really fully operational in full swing with full yield and full operational efficiency, and that some of those customers are clearly gearing up to say, look today, there's many, many, many players in the silicon carbide market, there is going to be a shakeout. We've just seen some news this week. And if I'm the first one to invest through the cycle to put up the capacity to have it up and running, I achieve a superior cost position and at some point, I can then gain market share. And some of those players who have this cost focus and volume focus have chosen deliberately our tool and they do continue to clearly place orders now with clear shipments already in 2025. So they don't care so much about the current environment but they rather put those capacities in the ground. So that I do confirm. However, how that fits up to the total picture, which is needed to give an outlook for the overall guidance, that's a little bit too early given how many moving parts are around us.
Olivia Honychurch: My follow-up is around the full year margin guidance. So 37% is what you achieved in H1 on the gross margin level. Your FY24 guidance is 43% to 45%. You'll be needing to get above 46.5% in H2 to get to even the lower end of target range, which I think would be the highest gross margin you've ever achieved. What gives you the confidence that you can get to that level, particularly in such a low growth year on the top line?
Christian Danninger: Well, I mean, we are quite clear on the shipments in the second half of the year given our order book. The key here is, of course, a much better product mix than some better fixed cost aggression due to the higher volumes. And all of that together then will result in this improved gross margin that will bring us to the target. So the key here is really the improved product mix, also the end market mix but also the new generation versus old generation mix.
Operator: Next question comes from Michael Kuhn of Deutsche Bank (ETR:DBKGn).
Michael Kuhn: Firstly, one on order intake, which was obviously strong in the second quarter. Still a major part of that seems to be for 2025 and that despite the fact that you have substantial inventory, which I think your clients also see. So my question would be, what makes your clients order now with such a substantial lead time and were there any concessions on your side made towards the clients to make them order now, be it on prepayments or any other contract conditions?
Felix Grawert: I could -- also as being a purchaser as one of my customers. No concession with me, sorry, I have to decline. So ona serious note, Michael, no, some customers have clearly their fab build out plans, especially those silicon carbide guys I was talking about. And they put their factories in the ground, they have their clear plans when they want to ramp, when they want to get volume up in place. And they see -- so you need, so to say, to push out ordering of the equipment, they rather put the orders in place when they have their plans and the plans are getting ready. And we would not be putting concessions on getting nice numbers, but in the end get lower margins, sorry, not with me.
Michael Kuhn: Then staying with related topic, inventories. You mentioned only a slight increase in the second quarter and you obviously said earlier that you only expect an improvement in the second half. As we are now in the second half and you probably have a clearer picture, if you're comfortable to let’s say roughly quantify what kind of reduction you could achieve in the second half and you mentioned some measures only taking effect into '25, maybe also a rough outlook on '25 and what level of inventories you would feel comfortable with over the upcoming quarters?
Felix Grawert: Let me also take that. So by the middle of '25, we want to be back to normal. So when we talk in 12 months from now, we want to be back to a normal level. The reason is we have decided to take a soft breaking strategy rather a hard breaking strategy, because we clearly want to be in a collaborative situation with our suppliers. You see despite the weak environment, we are doing well. We have a very good cash position. And we didn't want to break it too hard because at some point the next upswing is coming. And we're clearly seeing already that towards that. And then we will be on the other position, not slowing down with our suppliers but rather asking them to accelerate. And that was the reason why instead of doing a hard break strategy, which of course, we could have done. So to say, we decided to do a soft one. And you will see a gradual digression by the Q3, not too much, don't over expect. And then you will see a digression of the inventories Q4, Q1, Q2 and by the middle of next year, we should be back to normal. It really follows from our strategy.
Michael Kuhn: And could you quantify it back to normal?
Christian Danninger: I would consider normal levels of 60%, 70% of order backlog with some further optimization of our internal processes, maybe we can get down even further but that would be my best guess right now.
Michael Kuhn: And then one more on LED/microLED. Could you provide a rough split for the first half, what the contribution of each of the two was and how much more margin dilutive old tool LED business you expect to generate in the second half of the year?
Felix Grawert: Let me just check the numbers here. I think in the second quarter, it was over 40% of the total revenues. So that was quite a big one. I think throughout the first half, maybe 25%, something like that 25%, 30%, something like this. So just say a little over 30% as a total. And honestly, this is what it made is -- we don't have the numbers here in terms of margin effect. I mean you saw the overall gross margin where we came out. That's clear, yes…
Christian Danninger: The major hit, of course, came from the traditional red LED part, which comes at a lower margin.
Michael Kuhn: And then, very last question, promised. I think in some point in the release you speak about ongoing upgrades of the G10-SiC. Is that also applying to tools that are already installed at your clients' and was there any cost associated to that in the P&L in the first half?
Felix Grawert: Yes, that definitely applies to tools installed at our customers. So that involves a certain qualification time and after that the customer then buys the upgrades. And that's given that it improves the tool it's not free of charge, but it comes at a charge because it's improvement that we provide to the customer. So no, it doesn't come at a cost but rather it comes as a benefit to our P&L.
Operator: The next question comes from Madeleine Jenkins of UBS.
Madeleine Jenkins: We hear your customers referring to the consumables, the silicon carbide epitaxy, is like a key factor to consider when choosing a supplier. I was just wondering if you could talk a bit more about that and what that involves exactly, and also how it might defer between a batch tool versus a single wafer?
Felix Grawert: I didn't fully get the question, Madeleine. Could you please repeat?
Madeleine Jenkins: The consumables, for silicon carbide epitaxy, just kind of what that involves exactly and then how it defers from a batch to a single wafer tool?
Felix Grawert: So I do understand the question is, how consumables contribute to the difference of batch to single wafer tools? Is that the question you're asking?
Madeleine Jenkins: Yes, exactly. So we talk to your customers and they say that it's very important in deciding what tool to go for. So just any color you can provide on that would be good.
Felix Grawert: On the consumables, we've made a big effort to make sure that this contributes to our superior cost position that we can achieve with the batch tool. And that's also what we get back from our customers. So we see this as a clear advantage of our tools and to the superior cost position, which helps us to get the market gains that we are currently seeing. There's not much to say honestly about it.
Madeleine Jenkins: And then my second one is just obviously today you talked about gallium nitride potentially being used for EV inverters. Now obviously it's one of the biggest markets for silicon carbide currently. So I just wondered how you saw investors kind of being split between the two materials and also whether it impacts sort of your longer term kind of silicon carbide demand?
Felix Grawert: Well, I think the split is a technology battle and nobody knows how this battle will end up between gallium nitride and silicon carbide. And what we can say for sure is that any switch from gallium nitride to silicon carbide has a clear net-net benefit effect for AIXTRON, because as I said before, in silicon carbide, the biggest cost item is the substrate or still today is the substrate. But in gallium nitride, the biggest cost contributor or value adding step, you could also say, is the epi. So if volume is getting shifted from silicon carbide to gallium nitride that means that the addressable pie for AIXTRON is getting bigger. And this is also the reason why, of course, we work to support this trend in order to grow our market share of the overall silicon carbide value chain. And now how this battle exactly plays out, it's going to be a battle which is continuing or which has a couple of years ahead of it. Silicon carbide apparently is currently in the volume ramp. It contributes to the electric vehicles reaching a long range, a long driving range, which is one of the key buying factors for EVs, for battery electric vehicles at least. And now in the next years, we have a cost down roadmap ahead of us for both silicon carbide and for gallium nitride. Each of these technologies will come with multiple generations of dyes. And I think silicon carbide is somewhere around generation 3, generation 4, depending on which vendor you are talking to. Gallium nitride is still somewhere on generation 1, generation 2, so pretty early in it. And now it's going to be a technology race, a cost down race between these two technologies on the roadmap, essentially for -- given whatever switch performance, whatever you want to switch for a car of, let's say, 100 kilowatt, midsize car, and how much dye size area and how much cost do you need for this one. It's going to be a very interesting race to watch.
Operator: The next question comes from Didier Scemama, Bank of America (NYSE:BAC).
Didier Scemama: And so follow-up to a previous question, I think Olivia asked about '25. Just not sure I understand the reluctance or hesitation to guide on '25 at this stage, given your confidence on the order intake in Q3, Q4 and a pretty strong order intake in Q2 as well. So can you just maybe walk us through what are the puts and takes on those hesitation? I mean, I understand EV demand is a bit weaker, et cetera, et cetera. But surely, you've got backlog maturity. So are you worried about push-outs or are there any other elements to take into account? And I've got a quick follow-up.
Felix Grawert: First reason is historical. We've never done it before. So at this point in time, but we always at this point in get the question for a well understandable reason. And on a serious note to your question, as I said before, we have a very good visibility on the silicon carbide where I think we've given out a very bullish statement, as I made before. But the rest of the market is a bit of moving pieces and the rest of the market comes a little bit on shorter term notice and we simply don't know how that plays out. It's too early to say.
Didier Scemama: On the LED or the strength, which I think contributed to your gross margin dilution. Can you just explain why suddenly there was a sort of burst in orders in that particular end market? I thought you were far less active in that market that was sort of dominated by AMAC. Is there a change in the competitive landscape, do you have a better product than you used to, at least certainly lower cost than you used to?
Felix Grawert: So the market which in past years always used to be there and constantly ongoing. And then with the China holding crash that market collapsed completely because there was just overcapacity in the market and the market was dead and muted. And now what we do see is that gradually the market is coming back and especially the market is coming back with what I mentioned before additional players, new players entering the market as they see opportunities to get part of this market. And so to say, again, a reemergence of that market we get orders again. And this is a market where we have an extremely strong position that has nothing to do with the local Chinese players.
Operator: Next question comes from Martin Jungfleisch of BNP Paribas (OTC:BNPQY).
Martin Jungfleisch: I have two questions, please. First one, the silicon carbide order in the second quarter. Can you tell us how much will be delivered of that EUR105 million in 2024 and how much will be recorded in 2025? And then maybe if you can also comment how much of that order was coming out of China, please?
Felix Grawert: I don't have the data here. I have to do it out of my memory. So my message is a bit inaccurate, but qualitatively, I can give it to you. I would guess 25%, 30% gets shipped still in '24 from what I know, which customers are behind it. The rest goes into '25. Mostly, there is two existing customers behind of it and one new customer, which we got on board in the first quarter. In the first quarter, we announced the new customer is on board. Now in the second quarter, there was a very big volume order placed from that customer. So the majority goes into '25. And out of those orders, there was also a decent part coming out of China, I think there was multiple China customers amongst that. So yes, there was a certain China fraction but I'm not able to quantify how much of that it was.
Martin Jungfleisch: And then maybe a follow-up on the gross margin guidance. You left that unchanged or the downgrade on the revenues came from power semi, I understood. So was LED also also pushed out or was there any other factors, why you kept the gross margin guide unchanged?
Felix Grawert: Exactly, I think for the full year, I think the product mix didn't change significantly, as Christian mentioned already before, so for the full year integrated overall the four quarters. So that in the end, we can say that we could keep it on the same level. It was just a proportional cut from the revenue and about the product mix you can say in a simplified manner.
Operator: And we are moving on to the next question. Next question comes from Jürgen Wagner of Stifel.
Jürgen Wagner: A follow-up on your LED business, you mentioned strength in traditional or new LED in China, but as well microLED. How sustainable do you see both going forward? And with this new fab in Italy, you showed a slide where you mentioned additional EUR1 billion revenues. What capacity does that give you in total in terms of [revenue]?
Felix Grawert: So first of all, on your question about an LED and microLED and how sustainable, I think that's a very good question. As said before, on the question we just had, the LED business is a reemergence of the segment, which had been dead now for two years due to the housing crash. We hope it's sustainable. Let's see. With China, it's always a bit uncertain about what comes in waves and what is really a longer term. I believe some will stay. Whether it stays on this level, I don't know simply. With microLEDs, the orders we see is coming from customers building up our pilot lines, some customers continuing R&D. Surprisingly, some new customers taking up R&D or doubling down on their R&D in pilot line activities. So I think the market believes this micro thing is dead but in reality it does continue. Now again, I think the question on what level that continues, it's a bit difficult to predict, because as said this is R&D and/or pilot line facilities. And the question is, does it continue just to be on R&D and pilot line status or do we see, let’s say, with the next two years at least with some customers or for some sub-segment of the market the beginning of the volume ramp. And honestly, I don't have enough visibility to predict that. It would not be a serious message to give. Of course, I hope that it comes but I don't know. So that was on the LED, microLED. And help me what the second question or the second part of your question was.
Jürgen Wagner: You had some slides on the Turin fabs that you bought in your handout, and you said it will give you an additional EUR1 billion sales potential over time. So in total, what size are you preparing for adding your current capacity?
Felix Grawert: As said before, the main motivation was to be able to address that peak volume. So we have multiple customers asking for peak volume, asking, if we need this and this large number of tools and we need to squeeze that into whatever six months, because we have a new volume segment coming and we want to address that within a relatively short period of time, can you be absolutely sure that you can ship, even in case where you are pretty much loaded in your existing facilities in order to provide this peak capacity that we always find the word peak in our slides, that was for now the main motivation, just to make that clear. Now if we would load our existing facility in full and in parallel if we would load the Italian facility in full, I think we are reaching -- we would be able, or would reach somewhere EUR2 billion, EUR2.5 billion in revenue out of these two factories. So there's enough headroom from where we are today.
Operator: Next is Reuben Davis of [indiscernible].
Unidentified Analyst: That is of Kepler Cheuvreux. So I had a question just final final one on LED basically. If I hear you well, you're talking about reemergence and the pilot and R&D production lines, significant demand there. I think, obviously, investment cycles can be notoriously lumpy. But looking into next year, we should not be expecting a drop off right here, that's what we should take into consideration for our models. And I think even for this year, did I hear answer pretty correctly that basically you would have a significant double digit million euro contribution both for traditional LED as for microLED this year, in other words, ahead of EUR100 million for 2024? That's the first question.
Christian Danninger: That's correct, yes. Both of them together, they will contribute in a level higher than EUR100 million, yes. And that has not changed.
Felix Grawert: Together, not each of them, just to be clear.
Christian Danninger: And the logic between the two, I mean, one is the LED market with the dynamics that Felix explained, the traditional red LED market from China and the microLED market, driven by R&D and production orders right now. Both of them a little bit unpredictable, how they will continue in the next year but for different reasons. Does that answer your question?
Unidentified Analyst: Yes, I guess so. Obviously, it’s always difficult to get a bit of a good gauge on next year, given the lumpiness of the investment cycles. And I think in microLED, we see a lot of contrasting activity, I would say. Some double down, you said. Others are ramping up. So just trying to get our heads around how we should think about microLED for next year maybe beyond…
Felix Grawert: We do fully understand the question, but we unfortunately not set to give a serious guidance on that one, because we simply don't know the answer before. That again plays back into the questions we had on providing guidance towards '25. If it would be just for silicon carbide and so on, we probably could. But for this thing we simply don't know, there's too much uncertainty at this point in time.
Unidentified Analyst: And then just a second question on the Turin side. I think it looks like a great addition to expand capacity, but I would imagine that it will take some time before you start utilizing capacity here as you still have plenty at Herzogenrath. So I was curious how you look at, let’s say, the ramp up costs or or operating costs on this new site before you're running at full capacity, which I understood in the initial phase would be about 30% to 40% extra? Could there be some drag on margins we should take into consideration?
Felix Grawert: Not too much. Honestly, it was a very lucky bunch. So we looked across all over Europe for an exemption. It came clear from the time lines we wanted to secure, we wanted to go for brownfield rather than a greenfield facility. And the facility we were able to get was an old injection molding plant. So a lot of the infrastructure in terms of power electronics, electrics, water supplies, all that is already in the ground. So it was just an outstanding deal that we could make. That was -- once we had it, we concluded relatively fast on that one. As we said, the initial invest we have to take to get it up and running is pretty low for that one low double digit millions. It was just a great bargain, in other words, you can say. And our plan is now to install there initially a team to ramp it up to get it up and running, a smaller team. You indicated drag on margins or the cost situation, we have that very well in mind. And to really get the operations running and smooth, to get really efficient and good business processes and operational excellence and all that. And then really to ramp that up to a level where it's running efficiently and smooth. So clearly, having the topic about cost on the radar is a big part also of our discussion, such that then we are at a continuing level there where for the situation that a spike, a volume spike is coming, which is ultimately the purpose why we built this for, we have enough substance, so to say, to ramp it up and to expand. But you can't do that if you just have three people and then suddenly you want to have 100 people in the facility that doesn't work. But let's say if you have 30, 40 people in the facility and then you want to triple it, you have one person who can always train two other or three other people or supervise, that’s kind of an idea is behind it.
Operator: As that are no registered questions anymore, I would close the Q&A session now and turn the floor back over to the host.
Felix Grawert: Thank you very much, Anna. Thank you all for listening in and thank you for your good questions. If there are any questions and answers, please contact the IR department. We will be at your disposal as always. For the rest of you, I wish you a happy summer holiday. We will be on the road in end of August and September. So for sure we're going to see a lot of you in person. And those we don't see, we'll be back on October 31st with our Q3 call. Hope to welcome you all back at the latest then. Have a great day. Goodbye.
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