AIXTRON SE (AIXA) Earnings Call Transcript

Good afternoon, ladies and gentlemen. This is Christian Ludwig. A warm welcome from my side to AIXTRON's Q2 2026 Conference Call. I am very sorry for the technical delays that we had experienced and that had to keep you waiting. We had some major issues with our external provider. We're working on this. So next time, hopefully, we'll have a smooth communication. With me in the room today is our CEO, Dr. Felix Grawert; and our CFO, Dr. Christian Danninger, who will guide you through today's presentation and then take your questions. This call 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 content to the recording. Please take note of the disclaimer that you find on Page 1 of the presentation document as it applies throughout the conference call. This call is not being broadcast via webcast or any other media. However, we will make a transcript available on our website after the call. I would now like to hand you over to our CEO for his opening remarks. Felix, the floor is yours.

Thank you, Christian. Let me also welcome you to our Q2 '26 results presentation. And again, also from my side, from the Board, apologies for the delay with our external provider. Thanks a lot for everybody who kept waiting. I will start now with an overview of the highlights of the quarter and then hand over to our CFO, Christian, for more details on our financial figures. Finally, I will give you an update on the development of our business and guidance. Let me start by giving you an update on the key business developments of the second quarter on Slide 2. The key messages are: we've received strong new orders of EUR 215 million, predominantly driven by Optoelectronics. Revenues came out at EUR 115 million, in line with our guidance for the quarter, reflecting the ongoing ramp of the Photonics business and coming out of the trough in Power Electronics in Q1. We also generated a very strong cash flow. Operating cash flow reached EUR 119 million and free cash flow came in at EUR 114 million. This was predominantly driven by higher customer advanced payments, reflecting the strong order momentum and supporting the upcoming production ramp. Despite the soft start into the year, we are fully on track to achieve the full year guidance with revenues of EUR 560 million plus/minus EUR 30 million. We had a soft Q1 with revenues of EUR 59 million. We achieved $115 million in Q2. We plan to further increase output in Q3 to 180 million plus/minus 20 million, and we target a very strong Q4 with a further increase in output beyond the Q3 level. As you can see, we are ramping up our production with a steep ramp rate and significant increase of output every quarter of this year to serve the growing demand in optoelectronics. Finally, construction of our new site in Malaysia has started and is fully on track. Christian will now provide you a detailed look at our financials on the following pages before I take over again. Christian?

Thanks, Felix, and hello too. Let me start with the highlights of our revenue development on Slide 4. Q2 revenues marked the next step in our planned production ramp increasing to EUR 150 million from EUR 59 million in Q1. This was fully in line with our quarterly guidance of plus/minus EUR 10 million. Compared with the prior year quarter, revenues were 16% lower. For the first half, revenues amounted to EUR 174 million. The revenue mix already shows the growing importance of Optoelectronics. 54% of the equipment revenues came from Opto, 23% from LED and micro LED, 22% from GaN and SiC power and 2% from R&D tools. Our aftersales business contributed EUR 52 million and remained stable in absolute terms year-over-year. As a result, its share of group revenues increased to 30% from 21% a year ago. Now let's take a look at the financial KPIs of the income statement on Slide 5. Gross profit in Q2 was EUR 47 million, corresponding to a gross margin of 41%, unchanged from Q2 last year. This demonstrates a solid margin performance as volumes began to recover. For the first half, gross profit was EUR 58 million and gross margin was 33%, 3 percentage points below the prior year period. The H1 margin reflects the lower production volume, particularly in Q1 as well as a mid-single-digit euro million one-off expense related to the personnel reduction in operations. Operating expenses in Q2 were stable year-over-year at EUR 32 million. Higher R&D spending was offset mainly by increased R&D grants and significantly lower FX losses. The rise in R&D expenses primarily reflect higher depreciation and material costs as we continue to invest in our technology road map. For the first 6 months, operating expenses were EUR 65 million, up 3% year-over-year. EBIT in Q2 was EUR 15 million, equivalent to an EBIT margin of 13%. This represents a clear turnaround from Q1 and reflects a higher revenue level and improved operating leverage. For the first half, EBIT was negative EUR 8 million, corresponding to an EBIT margin of negative 4%, mainly due to low Q1 volume and the one-off expense already mentioned. Let me now turn to the key balance sheet and cash flow indicators on Slide 6. Working capital decreased by EUR 184 million compared with the end of 2025. This was primarily driven by strong customer advance payments and the conversion of receivables from last year's fourth quarter revenues into cash. Trade receivables declined to EUR 81 million at the end of June from EUR 131 million at year-end. Strong order momentum resulted in a substantial increase in customer advance payments. The composition of current orders and individually agreed payment terms also provided a modest additional benefit. At the end of June, advanced payments stood at EUR 197 million, more than EUR 150 million above year-end 2025. They represented around 43% of the equipment order backlog and provide a meaningful funding for the upcoming production ramp. At the same time, inventories increased to EUR 318 million from EUR 284 million at the year-end, mainly reflecting higher work in progress for shipments scheduled in the coming quarters. Trade payables rose to EUR 49 million from EUR 34 million as purchasing activity increased to support the ramp. Both developments are consistent with the planned increase in output in the second half. Overall, operating cash flow reached EUR 173 million in the first million in the first half, an increase of almost EUR 90 million from EUR 85 million in the prior year period. In Q2 alone, operating cash flow was EUR 119 million. The key driver was the strong increase in customer advance payments, which supports the financing of the production. Free cash flow was correspondingly strong at EUR 162 million in the first half compared with EUR 74 million a year ago. In Q2 alone, free cash flow amounted to EUR 140 million. Capex in the first half was close to EUR 11 million. For the full year, we expect Capex of around EUR 55 million comprising our baseline investments and approximately 2/3 of the announced EUR 40 million investment in the Malaysia expansion. The process to sell our site in Italy is ongoing. Our liquidity, comprising cash, cash equivalents and other current financial assets increased to EUR 816 million as of June 30, 2026. After deducting the liability component of the convertible bonds, net financial assets amounted to EUR 460 million compared with EUR 222 million at year-end 2025. Our equity ratio remained strong at 61% despite the increase in total assets following the bond issue. With that, let me hand you back over to Felix.

Thank you, Christian. I would like to continue with an update on key trends in our different markets. Overall, the picture in Q2 was very much in line with what we described at the end of Q1. Optoelectronics remains very dynamic and is currently the clear growth driver for AIXTRON, while the power electronics and LED micro LED markets remain in different phases of recovery. I will start with Optoelectronics. Momentum remained exceptionally strong in the second quarter. After the clear inflection point we saw in Q1, the market continued to accelerate in Q2, driven by strong demand from AI data center applications. In Q2 alone, optoelectronics accounted for 75% of equipment orders, making it by far the most important contributor to our order intake. Based on our current visibility, we expect order momentum in optoelectronics to remain at very high levels in the second half of the year. The key driver remains the ongoing architectural shift in AI data centers from copper-based connections at lower speed optical links towards high-speed optical connectivity at 800 gig and eventually 1.6T and beyond. This transition requires a significant increase in the number and performance of optical links and therefore, in the number of advanced lasers needed. In the near term, demand continues to be driven by indium phosphide-based EMLs and CW lasers for data center applications. At the same time, customers are already working on photonic integrated circuits as the next step in technology road map. Importantly, the current investment wave is no longer limited to a few large players. We now see leading laser suppliers worldwide committing to capacity expansions and the trend is also extending to smaller laser manufacturers. Based on the current pipeline and customer discussions, we expect this investment wave to remain at very high levels over the coming quarters. This gives us strong visibility and supports our confidence in sustained momentum in optoelectronics well into '27. As discussed previously, our G10 ASP platform is benefiting strongly from this trend. Customers are increasingly standardizing on this AIXTRON platform for advanced photonic devices. The reason is that yield, uniformity and cost of ownership are critical in this application. Many systems are initially configured for 4-inch wafers, but are already prepared for a transition to 6-inch, giving customers the flexibility as the technology and supply chain evolves. Let me keep it therefore short on SiC and GaN power electronics as there's not much new compared to the last quarter. In SiC, the installed base of equipment at customers remains underutilized and customers remain cautious about new capacity investments. At the same time, the underlying demand for silicon carbide chips continues to grow, and we are seeing utilization rates gradually increase at our key customers. When this leads to new tool orders is difficult to predict at the current point in time. Also in gallium nitride, demand for power equipment remains moderate. Also here, customer utilization is gradually increasing. However, it remains too early to determine when this will translate into additional equipment demand. Strategically, our conviction around GaN remains unchanged. Recent announcements and discussions around Computex and PCIM have reinforced our view that gallium nitride has a strong opportunity to win designs in AI data centers, particularly for 800-volt DC to DC conversion. Over time, we also see the potential for GaN to move beyond the 48-volt level and into lower voltage point-of-load applications. In such architectures, GaN could replace multiple stages of silicon MOSFET-based power conversion, enabling more compact and efficient power delivery for AI infrastructure. AXON remains very well positioned in GaN, yet we have not seen signals for the inflection point for significant new order momentum. Finally, a brief comment on LED and micro LED. Both applications remained soft in the second quarter. We shipped systems for red orange mini LED in previous quarters, and these systems are currently being installed and ramped up. However, the broader investment environment for mini LEDs remains limited as of today. For micro LED, most of the demand we see today is driven by AR glasses. We continue to believe in the long-term potential of this technology. We see more and more focus of end customers on innovative products such as the AI glasses of Meta Ray-Ban, which may, at some point, generate stronger customer pull. The exact timing for such order uptick remains unclear as of today, but it may materialize as early as '27. Let me now move to our footprint expansion. Our new site in Malaysia is set to become an important element of our global footprint and represents a key step in strengthening our manufacturing base. With the new facility in Penang, we are extending our presence in one of the world's leading semiconductor ecosystems. The project is running fully as planned and groundworks have already started. With that, let me now move on to our guidance. We confirm our increased guidance for 2026 as published in mid-April. We expect revenues to come in at EUR 560 million in a range of plus/minus -- we expect a gross margin of about 42% and an EBIT margin between 17% and 20%. The guidance for the gross margin and EBIT margin includes one-off expenses in the mid-single-digit euro million range related to the personnel reduction in operations. The measures will lead to annualized savings of a similar magnitude in the future. For Q3 '26, we expect revenues of $180 million, plus/minus 20 million. For Q4 '26, we then target a further increase in output corresponding to the steep quarter-over-quarter ramp that characterizes our fiscal year 2026. We continue to monitor geopolitical developments closely, particularly in the Middle East. This includes potential impact on energy prices, supply chains, financial markets and investment and demand behavior. At present, we do not see a significant impact on our business, but we will respond appropriately if the situation changes. With that, I'll pass it back to Christian before we take questions. Thank you.

Thank you. Operator, we are now ready to take questions.

[Operator Instructions] The first question. Question is from Adithya Metuku from HSBC.

Two questions, please. Firstly, just on optoelectronics demand, you talked about demand still accelerating. We've also seen similar commentary from your customers. I just wondered, based on your discussions, when do you see the supply-demand coming to balance indium phosphide laser landscape? That's the first question. And I've got a follow-up.

What do you mean -- let me question back. What do you mean with the demand and supply coming into balance? I'm not sure I get the question.

Yes. So if you look at your customers, if you take Lumentum's comments, they made some commentary around being 30% below demand, and they don't think they will be able to meet the demand that's out there in '27. So I just wondered -- and that's clearly driving the investments, which you're benefiting from. So when do you see their supply, which is tied to these machines you're producing coming in balance with the demand that they're seeing from their customers, if that makes sense? Is it 28? Is it 29? What are your customers telling you?

I cannot comment on individual customers. And also for us, it is difficult to assess the situation, the demand-supply situation that our customers are in because I'm unable to see the pipeline, the demand pipeline that's behind my customers. So please understand I cannot comment on that particular aspect. What I can comment on is on the AIXTRON side of things. And what we are seeing here is very clear that we see that the demand for laser, for tools for laser for the optoelectronics is a very broad market momentum. It's not only 2 or 3 players, but rather we see a diversified set of, I would say, almost 15 laser companies, many, of course, the big players from Europe and the U.S., very big players also from Taiwan and from Japan. But also, we see a very strong momentum from China. I think let's recall, we all know China has a very strong optoelectronics ecosystem. And this whole industry, I think, almost at a global breadth, very well diversified. As I said, about 15 players who make up, we just analyzed that about 80% of our order intake is taking up quite a strong momentum. The customers are communicating to us also their forecast when they would like to have the tools for their individual ramps. -- that typically depends. They have some space left in existing factories and customers start building new fab construction projects. And then whatever the customer fab is scheduled to get online, let's say, in the second quarter of next year, then we make sure that we reserve for the slots so that in the second or third quarter of next year, we can serve them. So we see here a broad and a continued long momentum ramping up and really building the capacity base that is needed. This is what we see to describe the demand behavior on the customer side. Maybe that's a bit helpful.

Yes, of course. And just as a follow-up, I had a bit of a technical question. So -- my understanding from recent developments is that when you go to CPOs or any other architectures that use an external laser source, you have a significant amount of losses before the light is actually fed into the fiber. And so that means there is a need for a lot of amplification lasers, et cetera. So the question is, for a given optical link bandwidth, if you were to move from a pluggable to a CPU with an external laser source, do you see a significant increase in the indium phosphide die or die size that is needed. So for example, if I take a 1 terabit per second transceiver and substitute that with a 1 terabit per second CPO, do you need more indium phosphide die and more extra machines for that transition?

Without going too deep into the technical details and also every of the customers has a different architecture behind it. What we see is generally that with increasing speed, we see increasing die size and increasing wafer capacity needed. That comes simply as the speed goes up, modulation gets more lossy and more die sizes. So the overall trend, higher speed rates is driving also further wafer demand.

It's from Mr. Martin Marandon-Carlhian from ODDO.

My first one is on the '26 guidance. Just a clarification there. I mean, there was no upgrade to the guidance, but the order intake is very strong. So do you think -- I mean, I assume that a lot of orders are going into '27. So would you say that the bottleneck for this year, it's more about execution than anything else? That's my first question.

That's a fair remark. So we feel comfortable in hitting the guidance. As you see, as we have outlined, we are steepening and ramping up our output quarter-over-quarter. Yes, you saw the around 60 in the first quarter, 115 in the second, 180 or referring to the midpoint, right, EUR 180 million for the third. And then if you just do the math, around 200 -- a little over 200 for the third quarter. We are not limited by orders. You see that also in the pie chart we had in the deck, but we are rather now really doing everything to execute to make sure that with this laser boom that has just started early in March, just not even 3-4 months out to work to ramp up our own capacity to work very closely with our suppliers. We have very good partners over the years. And of course, the laser machines need some different parts than the power machines to ramp up the supply chain. Hence, you see this steep quarter-over-quarter increase, and that's really for the year the limiting factor. It's not. And I think the good news is we are quite able quite well to satisfy our customers' needs to get the machines out as they need it. But you can imagine such a steep ramp from 60 to 200 3x within a year in terms of output, that's quite some work behind it.

Helpful. And the second question is on the Photonics orders. I mean you mentioned that the momentum is very strong and will continue to be very strong. So looking at the run rate today, it implies that sales could be around EUR 900 million next year. So do you think we are kind of at a high plateau in terms of orders? Do you think we'll go higher? Or should we expect a little bit of volatility quarter-to-quarter for these orders?

Good question. Honestly, I think around EUR 200 million, what we have seen now is an order intake is for the next quarters as much as we have visibility what we are looking at. So we think that's a fair assumption to see. And then, of course, with a bit of a delay time, the lead times for equipment shipments, we will then see that also translate into revenues. So I think your guess is approximately right.

And the last one, if I may, on GaN adoption in data centers. I understand that it's not in the order intake yet. So -- what the discussion with customers are looking like at the moment? I mean, is it normal we don't see it yet? Or do you think the time line for mass adoption have somewhat moved?

So I think I wouldn't say the time line has moved. I think the market -- the capital markets, in particular, has misunderstood the time line and it's now just realizing how long it takes. So let's recap, right? We saw the new 800-volt architecture. And now the implementation of that architecture is going to come in steps. the first stage where we see a silicon to switch to wide band gap is going to be on the very high voltage side for the silicon carbide front end. When you do the down conversion from the overland line from whatever 10 kV, 13 kV all the way to 800 volt. This is going to be silicon carbide and that part is coming first. And then second, the down conversion from 800-volt DC all the way to 1 volt where the switching of the CPU and GPU is happening, the gallium nitride part that will come later. And I think the industry, especially the capital market has overestimated how fast that a transition is going. And I think we gradually see now the transition starting on the silicon carbide side and then with a bit of delay coming on also on the gallium nitride side. It's a massive change in architecture and this takes time.

Okay. But would you say that gallium nitride is still coming early '27 or '27 at least?

As we said in the prepared remarks, it's too early to predict and to forecast. We see a very clear technical discussions, and we see around the trade shows like Compitex and discussions that there is a hot momentum ongoing. We have not seen that yet translate into orders. And on our side, we have -- we don't have visibility and indications yet. But we have no doubt that it is coming. I hope you could see that also from my remarks.

Yes. And just the last question, just to clarify. If the orders, let's say, would come in early '27, would you know already by now? Or is it normal that sometimes you don't have this kind of visibility and you know by it a bit later?

I think it would be normal that we get notification relatively short term. Please recall that our systems are the tools of record across the whole market for the gallium nitride power. So all the development work, all the pilot work, all the sampling and preproduction work of all the customers has been done on our systems, either the older Series G5+ or the newer Series G10 GaN. So all the customers work with our system. which is they don't need us now to support in the preparation. And at some point, I expect the customers to come along with multi-dozen tool orders and say how fast can you ship please?

Next question is from Gustav Froberg from Berenberg.

Two and half, if I may. Firstly, just on OXO and the orders in Q2, very strong, obviously. But -- is it correct to assume that the rest of the business is kind of stagnated or declined a little bit in Q2 versus Q1? Or another way of asking it, do you have a sort of base level view of orders, excluding the extra order intake you're getting from the up cycle in Opto at the moment that we can think about as a sort of sales level run rate, if you like? That's my first question. And then second, last quarter, we talked about 80 to 120 tools needed for the Optomarket per year. It seems you're pretty much already there for H1. So I want to know in a little bit more detail if this preliminary view that you gave in Q1 has changed or if you're simply hitting that number a little bit sooner than you thought you would?

Very two very good questions, Gustav. So I think first question on the remainder of the business. I think as we have indicated, the power business continues to be stable at a low level. Silicon carbide pretty slow because of the underutilization and overcapacity still in the market. The gallium nitride, here and there are some orders, but still on a lower level before the next wave of investment kicks in, as we just discussed with a longer question of margin. So I think these -- the 2 power segments are stable on a low level. And at the same time, as I've indicated, we expect for the next quarter the Opto momentum to continue to be strong and upbeat. We see that from the pipelines and the inquiry pipelines and sometimes in many cases, with the big guys, big customers also very clear forecast. So we have a very healthy confidence on the Opto momentum for the coming quarters. Now to your question about the tools, EUR 80 million to EUR 120 million, that was our initial forecast. We currently see a stronger momentum than that. It's too early to predict where exactly that's coming from. It could be that the overall wave is bigger than we have expected. Let's see how it continues, but we are currently seeing a bit stronger momentum than this EUR 80 million to EUR 120 million. Very well.

The next question, Bank of America, Oliver Wong.

First question is on capacity. So I understand that, I guess, if you take the midpoint of full year guide and the Q3 guide, let's say, Q4 at $220 million. And if we were to -- if this was to be stable going forward into next year, that would imply, let's say, $880 million in full year capacity. Is that the right way to think about it?

So you should consider capacity not as a limiting factor. Please recall the equipment business is relatively CapEx light. So for us, the situation is very different from that from our customers, right? Our customers need a stab in the clean room. The customers need our equipment, luckily. And for them, it's always they need, all the CapEx, all the preparation with multiple months, if not several quarters of preparation time to create capacity. For us, on our hand, we are relatively CapEx light, as you know. And we have a decent flexibility also to shift some of the assembly tasks. If you recall, what we do at AIXTRON is mostly assembly and test in our own premises, in our own clean room environment. And we have a big flexibility in times of upside swings as we are now realizing to put some more of the work to our suppliers. Let's say, the suppliers in demand peak times then take some more additional assembly steps and we get, for example, a tool partially half assembled already when it comes to our shop floor means the tool is then not standing, whatever I put arbitrary numbers, not taking whatever 10 weeks on our shop floor, but rather taking 6 weeks on our shop floor because 6 weeks of the work has been already in an outsourced assembly space, just to shine light on why this is such. So therefore, capacities are not a limiting factor to us in.

Got it. But my understanding is lack of the full year raise in spite of the strong orders, that was I guess, somewhat related to some sort of supplier capacity constraint. Is that correct or not?

It's a ramp rate. It's not a capacity. It's a good one. Good question to clarify that. Thanks for following up on that one. It's a ramping rate constraint. It's not a capacity, right? It's the question within the given machines, premises, buildings, clean room space, what I consider capacity is how fast can we hire people on board, how fast can our suppliers hire people to operate the machines, which are then being used to manufacture the parts. So it's a purely limitation of the speed, how fast we can accelerate. So think about your car going on a highway, you have no VAC, but the question, how long does it take you to reach your travel speed.

Yes. Yes, makes sense. So I guess like we can kind of run rate, let's say, 220 million Q4.

Yes, no problem. Once you are at travel speed, you can choose easily and comfortably...

Next question is from Martin Jungfleisch, Paribas.

First one on gross margin. I think the implied gross margin for the second half is around 46%. What is your view on phasing here? Should we expect more like 44%, 45% gross margin in the third quarter, maybe up to 47% in the fourth quarter? And with that gross margin level of around 46%, let's say, in the second half, is that sort of level you're kind of comfortable with for next year? Or would the Malaysian facility ramp have any impact on that in the short term?

So honestly, we haven't done the math on the details. But what we clearly see is that the laser systems carry, of course, a bit of a better margin profile, simply coming from the fact that is highly, highly, highly complex systems with a lot of -- and all our customers have their own differentiating features that their orders. They very differentiated recipes. So the laser systems are -- I think laser epi is some of the most complicated stuff that customers make on our tools. And given from these technical requirements, of course, that translates then into a bit healthier margin profile. And from that onwards, I would also expect -- or we would also expect in '27 to clearly see an uptick in terms of the gross margins, as you rightfully said. So it will be a good year '27 that we can already see ahead of us.

Okay. But is there any ramp costs for the Malaysian facilities that you're seeing in 2027? And if that is it meaningful?

There's some ramp costs, of course. There's also some fixed cost digression effects. The first order considered is the one.

Okay. And then the second one is really on Opto. Can you disclose what kind of configurations you're mainly shipping today? Is that still mainly 4-inch? And is it increasing 6-inch? And then also, have you received any data on how the epi yields at your customers are progressing in both 4- and 6-inch.