Aixtron Se Unsp/Adr

The conference is now being recorded. Ladies and gentlemen, welcome to Extron's full year and fourth quarter 2020 results conference call. Please note that today's call is being recorded. Let me now hand you over to Mr. Guido Pickert, VP of IR and Corporate Communications at Extron, for opening remarks and introductions.

Thank you very much, Operator. Let me start by welcoming you all to EXTRON's presentation of full year and Q4 2020 results. I'd like to welcome the members of our executive board, Dr. Felix Graber, Dr. Ben Schulte, and Dr. Jochen Link, who joined us last year in October, as well as our VP of Finance and Administration, Charles Russell. As indicated, this call is being recorded by EXTRON and is considered copyright material. As such, it cannot be recorded or rebroadcasted without permission. Your participation in this call implies your consent to this recording. Please take note of our safe harbor statement which can be found on page two of our results presentation slide deck as it applies throughout the conference call. You may also wish to have a look at our latest IR master presentation with additional information on Exxon's markets and its technology. Both slide decks are available on our website. This call is not being immediately presented via webcast or any other medium. However, we will place an audio file of the recording or transcript on our website at some point after the call. I would now like to hand you over to first Bernd Schulte for opening remarks.

Bernd. Many thanks Guido. Let me all welcome you to our full year 2020 results presentation. And I will start as usual with an overview of the key developments for the year before handing over to Charles for more details on our 2020 figures and Felix giving you updates on our achievements in our business areas as well as the outlook for 2021. Let me start by giving you an overview of the key developments last year on slide three. In Q4 2020, orders came in at 92 million euros, which is 30% higher than the same figure in Q3 2020. As broadly expected, revenues in Q4 were strong at 108 million euros, which was almost 70% higher than in Q3 2020. While our optoelectronics business was slightly lower in terms of revenues compared to 2019, we saw increasing demands resulting in almost doubling of the orders receiving compared to 2019. This strength was driven by both lasers for Datacom as well as for 3D sensing with a particular order strength in Q4. In power electronics, revenues and orders were up significantly, driven by strong demand for GaN power equipment. Felix will give you more details later In fiscal year 2020, we fully met our 2020 guidance with a total order intake of 301 million euros and revenue of 269 million euros. Gross margin was at 40% and EBIT margin at 13%. Let me now quickly give you an update on our potential impact of the spread of the COVID-19 disease. Our increased internal safety measures have proven effective to mitigate the risk of infection within our premises. We continue to not have recorded any significant effects related to COVID-19 on our operations and business. However, we will continue to watch the development of the global pandemic very carefully and remain to be ready to take measures if necessary. Before handing over to Charles, let me say a few words to our dividend proposal we have made due to our strong results achieved during fiscal year 2020. We, the executive board, as well as the supervisory board, propose to pay out the dividend for full year 2020 of 11 euro cents per share. This will have to be approved by our shareholders on our annual general meeting on May 19, 2021. This represents a payout ratio of 36% of our root net result, which was 34.5 million euros. At this point, let me now hand you over to Charles for a more detailed overview on the full year 2020 numbers. Charles?

Thanks, Bernd, and hello to everyone. Starting on slide four, our income statement. As expected, total revenue for the year was 269 million euros, compared with 260 million euros in 2019. Gross margin of 40% in 2020 was 2% lower than the 42% in 2019. The difference is attributable to the US dollar euro exchange rate effect between the two years. Overall operating expense in the year increased from €70 million in 2019 to €73 million in 2020. G&A expense increased to €18 million in 2020 from €16.5 million in 2019, mainly as a consequence of increased recruitment costs and other variable expenses. R&D expense of 58 million euros was 3 million higher than in 2019. This is a reflection of our product development work for our MOCVD systems, including power electronics and mini and micro LED. Here we've taken the next steps and we'll start to ship first systems to test customers worldwide. Towards the end of the year, spending on our OLED development reduced. However, costs for the full year were similar to 2019 at €17 million. Net other operating income of €13 million in 2020 compared to €12 million in 2019 mainly consisted of R&D grant income of €8 million and a €3 million reversal in Q1 of an impairment charge on the facility in Germany. We generated an EBIT of 35 million euros for the year compared with 39 million euros in 2019. The effective tax rate in 2020 was 2%, mainly due to the recognition of additional deferred tax assets and because of the reversal of the building impairment. Without these adjustments, the effective tax rate would have been just over 12% of pre-tax profits. The net profit for 2020 was 34 million euros compared with 33 million euros in 2019. Turning to the balance sheet on the next slide, as expected, the high level of sales in the quarter produced a substantial reduction in inventories between the end of Q3 and year end. At 79 million euros, inventories were similar to the previous year's level. The high quarterly sales volume is also reflected in the increase in receivables to €41 million, most of which will be collected in Q1 2021. Advanced payments received from customers of €51 million were similar to the end of 2019. Advanced payments were the equivalent of 34% of the backlog. Our cash balance increased to 310 million euros at the end of the year, including 60 million euros shown in other non-current assets on the slide. Moving to slide six, which shows our cash flow statement, operating cash flow of 23 million euros was lower than 2019 because of the increase in receivables at the end of 2020. CapEx increased during 2020 to €9.3 million from €7.7 million in 2019. This reflects an increase in demonstration equipment, the expanded product range, and investments in facilities needed for an expanding business activity. With that, let me hand you over to Felix.

Thank you, Charles. I would like to give you some perspective on our address market on slide 7, before concluding with the outlook for the rest of the year. In 2020, our optoelectronics business was slightly lower in terms of revenues compared to 2019. However, towards the end of the year, we saw strongly increasing demand. With this, the orders received in this area almost doubled in comparison to 2019. The strength was driven by lasers for Datacom from the 5G build-out as well as lasers for 3D sensing. Here we see a growing adoption of 3D sensing applications on both sides of the smartphone and in other devices. In the LED space, customer inquiries for tools to make Roy LEDs are driven by demand from the areas of full-color mini-LED displays and backlighting units. For the first time in 2020, we have received significant orders for Royal ADDs targeting the horticulture market, also called indoor farming. In micro-ADDs, we have seen the transformation of the industry from pure R&D to the manufacturing feasibility stage, making the adoption of this technology more probable than before. At this stage, the order volumes for this segment are still comparably small. In power electronics, the 2020 revenues and orders were up significantly, mostly driven by strong demand for gallium nitride power equipment. Here we continue to receive orders from customers who address the growing end markets of efficient gallium nitride chargers for consumer electronic devices, such as smartphones and notebooks, as well as efficient gallium nitride power management solutions for servers and data centers. In 2020, we have clearly seen the tipping point of broad gallium nitride power adoption, and we are now in the volume one phase for GaN power solutions that replace the incumbent silicon-based power management system. At the same time, we see increasing momentum in the area of gallium nitride and gallium arsenide RF solutions driven by the 5G build-out. In silicon carbide, we have achieved the qualification of our fully automated high-throughput system from two customers, and we continue to work hard to achieve the same with additional customers. With regards to OLED, we have achieved the customer acceptance of our GEN tool in December 2020, and we are now in customer discussions related to a scale-up of the system to larger size, which will be the final part of the qualification process. Let me now come to our outlook for 2021 on slide eight. For 2021, we expect order levels to once again increase year on year to a range between 340 and 380 million euros. This expectation is based on many orders that we have already at the beginning of the year and a very healthy level of customer inquiries across all applications. Starting with a backlog of 151 million euros, we expect revenues for 2021 in the range between 320 and 360 million euros. We expect our gross margin to again be around 40% despite adverse US dollar euro currency effects. We expect an EBIT margin of around 16%. The figure includes increased R&D expenses for the completion of the development of our next-generation product for lasers, micro-LEDs, GaN power and RF, and 8-inch silicon carbide. With this large portfolio initiative, we expect to secure our leading market position in our rapidly growing core market. Important to note is that order, order backlog, and the other guidance figures based on our 2021 budget exchange rate of $1.25 per euro. In the quarters to come, revenues and profit margins will be reported based on actual exchange rates. We have made our guidance based on the assumption that the current COVID-19 pandemic will continue not to have a significant impact on our business. Please also note that these estimates fully include the results of APIVA from top to bottom line. With that, I'll pass it back to Guido before we take questions.

Bernd, I think you had, right, we are now open for questions, sorry. Please ask, operator, please ask the participants to ask their questions.

Yes, of course. Ladies and gentlemen, If you would like to ask a question, please press 9 and the star key on your telephone keypad. In case you wish to withdraw your question, please press 9 and star again. Please press 9 and star to register for a question. And the first question comes from Oliver Honeychurch from Liverpool. Over to you.

Hi, thank you for taking the question. A couple from me, actually. I just wondered if, first of all, you could talk a little bit more about the OLED project that you currently have ongoing with one of your Korean customers. Have there been any more developments there over the last couple of months? And I guess elsewhere, sort of regardless of that customer, is it possible that you might look to mirror that project work with other customers going forward as well, for example, in China? That's my first question. Secondly, just on silicon carbide power applications, can you talk a little bit more about what sort of applications that you're currently seeing strong demand for at the moment and maybe give a bit more color to on whether you're getting any closer to qualification with customers with your platform there as you did towards the end of last year. Thanks.

Thank you very much for the two questions. Let me get started with OLED first. The key developments towards the end of the last year was the completion of the Gen 2 project. We achieved a full qualification and the project is concluded. final acceptance has been reached together with the customer. The specs have been fulfilled, so to say. And with that, this qualification project is concluded. And if you recall, this was the Gen 2 project, referring to a Gen 2, a smaller size or R&D type size of substrate, of glass substrate, which was attached to the R&D line of our customer. And that project is concluded. So in other words, you can say, The proof of concept has been done that the OVPD technology, which is a new technology, is working. That's concluded. And now we are in discussions with customers, both in Korea and outside of Korea, about a scale-up to larger substrate sizes. And larger substrate sizes are needed for a full-volume production where ultimately the technology would go. And those discussions are ongoing. It involves a lot of technical details, technical specifications, so that is something which we expect to take a couple of months. That's what I would like to give as a summary for the OLED and OLED discussion. With that, I come to your second question on silicon carbide. I think you had two elements. The first was what applications we address and about the qualification status. With respect to applications, we expect the biggest volume to go in the market for electromobility into the electric drivetrain in the main inverter of cars. We furthermore see silicon carbide elements to go in the onboard charger for cars, so to say the compact power charger converting the energy through the cable into the DC voltage in the battery. But we also see further use cases and volumes not as large in smaller quantities compared to the first two ones in fast charging stations in the infrastructure, for example, along the highways or at today we call it gas stations. In the future, it will be electric charging stations. You know, the discussion is going on about 100 kilowatt or even 350 kilowatt chargers which can charge, for example, 100 kilometers of driving distance for your car in, let's say, five minutes or so. This will clearly need silicon carbide as a power converter. But also, we see silicon carbide going into the electricity generation, so into inverters, for example, for solar power plants or for wind power plants. So there is many, many applications around. but by far the biggest use case is around electromobility. That's the main driver in quantity. To your second question, we have concluded the qualification with two customers. As we mentioned before, with other customers, our system is standing on their shop floor and qualification programs are running. Such a qualification typically takes several quarters because it not only involves that our tool produces appropriate wafers in a reliable manner, but it also means that these wafers need to be put through the production line of our customers, so to say, full mosfets of full devices being produced, and only when these fully produced devices pass the qualification test of our customers, they then typically also accept the tool. So that is a multi-quarter ongoing effort, which will well extend into the year 2021.

And the next question comes from Uwe Schupp from Deutsche Bank. Over to you.

Yeah, thank you. Good afternoon, gentlemen. Two questions, please. Firstly, on the gross margin and secondly, on the gallium nitride opportunity. So just firstly, on the gross margin, you get a relatively broad revenue range with about a 40 million or so number. I was just wondering how we should read the 40% absolute gross margin and why you also didn't decide here to give maybe a bit of a range. I would expect, given what we saw in the past, in 2018 or even before that, there should be some benefit from higher volume. And I would also assume that your product mix is probably going in the right direction with silicon carbide and potentially also some Vixel business coming back. And then secondly, just like your thoughts on the gallium nitride opportunity, as in how big do you see the market this year? I guess some of the concerns would be, is gallium nitride power really comparable maybe only to the 3D sensing market in 2018, when you basically had one strong year? Or do you really think the opportunity is maybe a bit more structural, more longer term, and really comparable maybe even to the silicon carbide opportunity? Thank you.

Yeah, thank you, Mr. Schuck, for your question. Let me get started with the gross margin first. So we have decided on the 40%, not to give a range, but the 40%, if you make a delta interval of a couple of percentage points below and a couple of percentage points above 40%, this is what we mean with a 40% range around 40%, just to address the aspect of the numbers. What are the drivers behind the 40%? First of all, there is a number of mixed effects behind it. Also, in 2021, we have significant volume from the ROY LED market. Also, in 2021, we expect some very large volume orders. with customers who expect, and can expect for good reasons, appropriate lower pricing points. So there is a mixed effect, mixed into the 40%. In addition to that, the US dollar in the year 2021, now with 1.25, of course, is a heavy burden on the margin. If you compare that with the year 2020, where over many parts of the year we were at an exchange rate of about 1.1. So this is a big heavy load on the gross margin. And last but not least, our production model is not too much asset heavy. It's relatively asset light and relatively flexible due to a high level of outsourcing of third-party contract labor So we do not have so big volume effects of dilution, fixed cost dilution, fixed cost digression as one would have, for example, a semiconductor company who has their equipment standing there and suddenly more volume is being produced on the same asset. This is not the case for us. So the volume effect does not give us such a big benefit. I think these are the main points going into the 40%.

And maybe to add, Mr. Schupp, When we say around 40%, I mean, we imply with that certainly a certain range. It could be slightly above or slightly below 40. It doesn't mean it will be exactly 40.

Okay, that's clear.

Yeah. With that, I come to your question on gallium nitride, which was essentially, is this one strong year, as we have seen with the VIXL, or is this a multi-year trend? So I expect that this is a multi-year trend, and of course, around the trend, there's always ups and downs. This is also very clear. What we are seeing today is the first investment, which to a large part, I expect to be covering the demand for chargers and mobile devices, which is one subsegment of gallium nitride. but we all, as we also explained in multiple instances, expect that gallium nitride will step-by-step penetrate multiple sub-segments. And it could very well be that the 2021 demand is covering the portable mobile device segment, but then we also look at the segment of IT infrastructure, the structure, be it in data centers, yeah, the power supplies for servers, albeit the power supply for mobile base stations and mobile communications, who are very hungry in terms of power, but later on then also expanding in markets such as motor drives and integrated power circuits, which, for example, you would find in white goods, household appliances, and air conditioning devices. And based on that, we expect that the gallium nitride is a multiyear growth trend, However, we clearly see a first wave of this trend linked to a very particular application. We also know consumer electronics in particular is an area where trends have very hefty and heavy movements because the adoption is very fast, while other more industrial applications then have a much more steady, slower momentum. So in a nutshell, yes, there is a strong wave, but it will continue as a long-term growth driver.

So to summarize, the growth this year will be really mostly, as far as you can see, for the fast charging opportunity in mobile devices.

I would think this is the biggest driver.

That's very clear. Thanks, Felix. Thanks, Bernd. And all the best, Bernd, for the next chapter of your life.

Thank you.

The next question comes from Jürgen Wagner from Stifel Europe. Over to you.

Yeah, good afternoon. Thank you for taking my question. You mentioned in your prepared remarks that micro LED is moving to pilot production. When do you see that market developing in volume and who would be your closest potential competitors? And a clarification on the OLED, you said you have Apeva included. from the top to the bottom line. Does that mean that there's any OLED contribution in your revenue forecast for 2021? Thank you.

Yeah, thank you, Mr. Wagner. For the micro LED, you're right. I mean, we're going, our customers are going now in testing micro LED production on small scale, but really testing the feasibility of mass production methods to build devices such as small displays for smartwatches or even large displays for TV. The timeline, how we see it in the moment is that you might see First, TVs in the market, but on very small volumes, certainly starting basically more like a market test, maybe in 2022 already. While the mobile applications will take a bit longer, I would not expect them before 23, 24, really on the shelf in the shops. Competition is the traditional one. We see, in terms of Gelden-Reiter, Gelden-Adler, the system, our old friends from the US, Vico, as our main competitor, and we take certainly that situation or that competition very serious, but we strongly also believe that currently that we have a clear upper hand.

With that, let me come to the second part of your question relating to Appliever. And the question was whether we have modeled in our guidance some revenue for Apiva. Yes, we have modeled in some revenue for Apiva based on our most realistic scenario, so to say. And we hope that this scenario does materialize.

And can you say how much?

Honestly, I don't have it off my head.

It's not a significant number. Okay, this way.

Okay. Thank you.

The next question comes from Stefan Uri from Oddo. The floor is yours.

Yes. Hello. Good afternoon. Actually, I have two questions. So the first one is about 2021, and I would like to know if you can rank by opportunity, the fastest growing opportunities this year between power, LED, and lasers. And inside power, I'm a little bit surprised that you seem to be more bullish on GAN than on SICK for the time being. So does it mean that what is driving your orders at the moment is not yet SICK and SICK is for the years to come. So that's the first long question. Sorry for that. And the second question is about the operating leverage. You have discussed about the growth margin, but EBIT margin also some may have expected a little bit more leverage. So why is that? That's the first question. And then What kind of long-term EBIT margin do you target? Thank you.

Let us address your questions one by one. I think the first question you asked is about the growth drivers for the year 2021. So we see strong momentum and strong growth from all the segments, which is very nice, across the board, both from the optoelectronics as well as the power electronics. The only segment which we have highlighted, because it's really sticking out of growing particularly strong, is the gallium nitride, which we already discussed with a strong demand coming from the mobile charging segment. which addresses the second part of your first question, gallium nitride versus silicon carbide. In both these segments, we expect a multi-year growth trend. Nevertheless, in the year 2021, gallium nitride is clearly in a wave of several customers expanding and fully equipping their factories, because now is the moment in the market, a spot on very fast coming moment where these devices are needed. That is typical for the consumer electronics industry, where an adoption of a particular technology goes very fast. Hence, 2021 is so strongly dominated by the growth of gallium nitride. And in comparison to that, silicon carbide, which addresses much more the automotive market, as we discussed earlier in this call, in this segment, we see a dynamic where customers step by step on a more steady, continuous pace equip their factories And in silicon carbide, in 2021, we do not see customers putting, let's say, 10 systems or 20 systems in one shot in the factory. We rather see expansions of customers adding one system, two systems, three systems here and there. However, in both segments, we expect a multi-year growth driver trend. And with that, I come to your second question, which I understood. And I do not know whether this is right about the margin. EBIT margin we have guided as around 16%. And this, of course, takes into account that also for 2021, as we have mentioned before, we expect an increase in our R&D expenses to complete our portfolio renewal. And that, of course, consumes again a certain portion of the gross profit realized from the higher top line. Maybe that addresses that part of the equation.

Okay. And long term, you think you can reach what kind of elite margin if you continue to grow?

I mean, that of course depends on many factors. Last but not least, competitive environment, pricing, pricing power, and so on and so forth. But I think 15 to 20% should be a reasonable range. Thank you. Thank you very much.

Next up is Andrew Gardiner from Barclays.

Good afternoon. Thank you for taking the question. I know a longer-term one, just in terms of the longer-term growth outlook. You guys have included a slide for the last few quarters in your deck looking at the growth out to 2025 for the compound semi-equipment market. We see its industry analyst forecast, and there's some fairly big numbers in there in terms of the 20% to 35% compound annual growth through 2025. I'm just wondering on your current perspective on this outlook. You've seen orders inflect quite strongly at the end of last year. It feels like the business is quite nicely balanced at the moment between specialty LED power and opto and with good orders coming across all of them. So what's your current perspective on those kind of long-term growth numbers? Are you willing to to endorse them as we look out over the next few years. And then just sort of related to that, what are you guys thinking in terms of CapEx need? You've already highlighted, Felix, the outsourced nature of your work, of your production. But do you need further CapEx in order to support this kind of growth that you're seeing at the moment? Thank you.

Yeah, thank you, Andrew. I think for all to understand, I think what Andrew is referring to is the slide we have in our slide deck, which basically displays the expectations from YOL development about epitaxial equipment and markets potential. And they have basically two scenarios. One, let's say a base case and an aggressive case. One is about CAGR of 20% and another 35%. The main difference between the two scenarios is how strong the arising of microalgae is, more or less. Let me comment. I would generally agree to the fundamental growth concepts behind that study. I would be more careful with the absolute numbers. From historical data, we think the absolute numbers do not stack up like reports there. However, the underlying momentum and the underlying applications, I would agree to. Meaning that there is a potential of 20 to 30% CAGR in this market, I would definitely agree to. And the driver is, I mean, Felix said it many times, it is power, silicon carbide, gallium nitride. We at Extron certainly would benefit from gallium nitride even stronger than silicon carbide due to our market position. And then there is the laser business, telecommunications and 3D sensing, as well as the LED market. And the LED market is a little bit... the wild card in it, let me call it, whether the micro-ID will make it to a volume product, which is not 100% given, which is currently in the test I mentioned before. But if that turns out positive, I definitely see the opportunity for such growth trends.

And with that, let me come to the second part of your question on the CAPEX. CAPEX in the last years was typically around 10 million euros per year, sometimes below, sometimes above. And for 2021, we expect a CAPEX of around 25 million euros. And that is driven by two major consumption needs. The one area is moderate expansion on our production facilities. in particular in terms of testing facilities, test equipment, and so on and so forth, this one. The other part where the CapEx is going, or a significant additional amount of CapEx is going this year, is additional prototypes for our new generation of products, which we are just about to bring into the field.

Thanks very much. That's very clear.

Next up is Charlotte Friedrich from Bloomberg. Over to you.

Hello. Thank you for taking my questions. Two and a half, please. The first one is sort of related on the order intake. Can you give us an idea of the split that you saw with your order intake in the fourth quarter of 2020? And then also, what kind of quotation level are you now seeing in the first quarter? Does it continue at this high level? And then the second topic would be around the growth margin. Do you already have a broad feeling for where the growth margin could go in, say, 2022, 2023, when you start phasing in your new product generations? Thank you.

Yeah, the order intake in Q4 was strongly, as we mentioned, dominated by optoelectronics applications, laser systems for telecom, datacom, and consumer electronics. I think it was quite strong. It was almost around 70% of the order intake just came from that application. So, there was a certain Q4 effect and we should also mention there were very few very big orders which drove that demand.

With that, let me come to the gross margin. You asked around 22, 23 where the gross margin would go and develop. On average, I would expect for our new product series a gross margin of 45 to 50% on that area because it offers additional differentiation potential and increased productivity. But please keep in mind when you model that in that in our market, the adoption of new product series typically take quite some time. So even if we bring in the product into the market in 21, 22, it easily can take two to three years after the qualification is completed until we see a broader market adoption. That simply comes from the dynamics that when a product is qualified in the sense of when a new tool is qualified, a customer has to re-qualify all the existing products on this tool before they can use it broadly for their production. And this is nothing which is, let's say, on our side, we are ready to produce. We could immediately switch our entire production from the existing series to the new series. However, our customers will convert new installations step by step. And therefore, I think we will have a transition phase from the existing product series, G4, G5, G5 warm oil, for our three application areas to the new ones I would say in a time period from 2022 to 24, and we will see the full roll out of the portfolio around 24, 25.

And I missed to answer one of your questions, sorry, about the order intake development. Right now we're seeing a continuation of a very healthy demand in terms of discussions with customer, contract discussions, quotation levels, et cetera. So we would not be surprised if we see in Q1 order levels even above Q4 levels.

Thank you very much.

Now we're coming to the next questioner. It is Malte Schaumann from Babock Research. Please go ahead with your question.

Good afternoon, gentlemen. The first question is cost. I look at SG&A that has been relatively stable over the past years with stable sales. Now as we're entering kind of a new growth phase, sales up to 350, potentially 400 million sales in a few years. Where do you see SG&A developing relative then to sales? And then in that respect also on R&D. R&D is currently rising due to the new product innovations as your earnings would afford spending for other things. So do you see areas of interest where you think, okay, in the past you abandoned several projects, but as you're in a better position now, do you see certain areas so that you should expect kind of an inflated or higher R&D position going forward as well due to your capabilities and potential market opportunities?

the R&D spending and what we expect going forward and on longer term. I mean, we are definitely, 2021, we are on the, for the compound product line, on a quite high level, and we even expected to grow over 2020 due to the very ambitious product initiatives we have running. We have started and we have to continue, we want to continue in order to come out with very competitive products in the course of 21 and 22. And that is the main driver of the increase in R&D cost in these two years. And beyond that, certainly we have to continue also thinking about the next generation developments. The market starts talking about 300 milliliter applications where we certainly have to respond to. and we will respond to. But I would not personally expect a significant growth over the levels we currently are in. Okay.

Yeah, go ahead. So potentially stable, so maybe stable at the current level, even if it's currently inflated, but going to new opportunities going forward, then the level might be sustainable.

Right. Yeah. Yeah. And SG&A, in terms of sales, I would not expect also a significant change. I mean, these are fixed costs. Certainly, if you have bigger and more demanding customers, someone needs maybe a few more people to support customers and stay in touch with them. However, I would say this is not really significant.

Yeah, okay, good. Then on all that, if you talk to other customers besides your lead customer, what's the potential time lag? Because your lead customer obviously has an advantage, should be theoretically being much closer to a decision because of available data. So if you talk to other customers, what's the potential time lag? And so when a customer really has to gather new data, you can provide, et cetera, before he might be ready to really decide on the next step. And is he prepared? Could such a customer already order kind of a pilot tool or would he firstly might copy such a mapping such as the Gen2 project because he has not the same data available as your lead customer obviously has?

Yeah, I think there's multiple factors determining the speed of the customer decision. And there's actually very, very different corporate cultures inside of different customers about the decision making. Some customers are very entrepreneurial and go very fast. Others want to have the almost perfect data before the project starts. So there is a broad bandwidth. And for sure, it will take a couple of months until that is concluded. but we cannot determine and say there is a certain pattern of decision making or there is a certain timeframe because in the end every customer is different and every customer looks at different aspects where they put their focus on. So unfortunately I cannot give a very precise answer to that one. The second part of your question about the size of the system, it is very clear the focus now to bring the size of the system to a production scale size because the R&D type feasibility study and phase has been completed, so the discussions are focusing on upscaling to Gen 8, Gen 6, whatever the sizes are for production equipment, and that's the focus. It's not a repetition of another R&D type system.

Okay, good, understood. Krigman on LED, what's the revenue share of the horticulture applications?

I think for Q4 it was minor. I think we talked more about in order intake and this, you know, we're selling typically on orders level of many tools and, you know, this equipment is versatile in the sense that you can produce LEDs for horticulture as well as for mini-LED or micro-LED. This is very difficult. We're just giving you a, let's say, a flavor what drives the demand. But there is no sticker on the tool. This is for horticulture or this is for red LED, for mini-LED. You can do with the tool all of it. And basically, customers are typically also serving all markets at once.

No, that's fine. Okay, thanks.

The next question comes from David O'Connor from XM BNP Paribas. Over to you.

Great. Thanks for taking my questions. A couple on my side, if I may. Firstly, the clarification on the order breakdown for Q4. What was the percentage of power within that, and does the mix switch to power in the Q1 order intake, or that incremental strength, is that driven by power? And I have one or two follow-ups.

So power electronics in Q4 2020 was relatively small. This was just around a 10% level. The expectation for the Q1 of 2021 is very different. Here I think we speak about power electronics about a 50% level. And that is, by the way, very typical, that quarter to quarter we have discussed together in many calls, the individual applications fluctuate quite strongly, and therefore it is so convenient and so nice now that we address multiple end markets and that these fluctuations overall level out and create a more steady envelope.

Understood. That's helpful. And then maybe a follow-up on the GAN side of things. Can you help us size that market for consumers? For instance, equip the industry for smartphones, fast charging. How many tools overall over the next one to two years do you estimate that market at?

This is a very difficult question. I must say I don't have the correct number off my head. It may be 30, 40, 50 per year. I don't know it exactly.

Okay, okay. No, that's helpful. Thank you. And then maybe for my last question on the silicon carbide side, one of your customers recently announced the move to 8-inch thick wafers. Does that change in any way how other customers think of their silicon carbide roadmap and Can this in any way help you crack some of these other customers? Thank you.

Yeah, that's a very good question. So there's a very interesting trend in the market. Initially, the focus of the entire industry was on silicon carbide 6-inch. Now everybody sees that, especially in the last one, one and a half years, the plan of all the car OEMs worldwide towards electrification has significantly accelerated. And I think we are now, it's clear everything will become electric. It's just a question of when it becomes electric. And we have also seen in the last one year that all the car OEMs are significantly pulling in that timeline for electrification. I think that was the major change that we saw in the automotive industry in the year 2023. And with that, now for the semiconductor industry, it also becomes very clear that very soon there will be very significant volume of MOSFETs for the drivetrain of all these electric vehicles. And this has now put a push on the faster 8-inch adoption, because for the adoption of 8-inch and new wafer size, the market needs to be big enough And suddenly, throughout the year of 2020, the expectations on that market have become big enough. And with that, customers are now pulling in the conversion from six-inch to eight-inch. It was initially planned around 2024, 25. And many customers are now talking about the adoption one to one and a half years earlier than that. So the adoption would be somewhere between 2022 to 24. That creates now a new dynamic. Everybody is now starting to make their plans for the 8-inch transition. And here, Extron has a unique position, and we believe, as you have indicated in your question, that we can exploit that, or it's our clear strategy to exploit that, because in our planetary equipment, we typically also, in gallium nitride, can both load 6-inch wafers and 8-inch wafers. The reactor furniture needs to be a little bit retrofit. It's a small kit, costs like $100,000 to $200,000. I mean, it's a small fraction of the total price of the tool, and then the tool can be retrofitted. And with this, we are currently now working on a, let me say, revision of our tool, which is both 8-inch and 6-inch capable. We had first discussions with customers on that tool. Actually, first customers have purchased the tool already. We plan to ship it early in 2022, so it's standing already on our shop floor here, and that tool will then be both six and eight inch capable, and it will give us an additional value proposition and an additional angle to approach and address more customer, or to crack into those customers where we are not a tool of record yet. Yeah, that's clearly part of our strategy.

Very helpful. Thank you.

And the next question comes from Harald Schnitzer from the ZBank.

Yes, thank you. Given the strong demand in power electronics, could you give us an indication how or if your market share has improved in GAN and SICK? And with regard to SICK for the automotive industry, Do you have follow-up orders after Bosch has signed these questions? And with regard to the tax rate for 2021, could you give a guidance on that as well as on the free cash flow? Thank you.

Thank you very much. Yes, market shares and power electronics. Market share in gallium nitride, we estimate that the market share is somewhere between 90 and 95%. In silicon carbide, our market share is strongly driven by which customer is ordering in which year. In the year 2020, which just passed, one of our customers was placing a significant amount of order compared to other customers or other players in the market which are not using our tools. So in the year 2020, we could register, I think, around 50, 45, 50% of market share in silicon carbide. But that was, again, strongly driven by the individual ordering pattern of customers so far to the market share. Yeah, a question?

In terms of the tax rate for 2021, I think I said in the speech that the underlying tax rate in 2020 was just over 12%, and I would expect somewhere between 12% and 15% to be the tax rate for 2021, bearing in mind that that is all subject to any change in recognition for the deferred tax assets or derecognition, depending on what the prospects are for future years beyond that. And in terms of free cash flows, We don't usually give a guidance on free cash flow. We stopped doing that during 2020, but I would expect it to be positive and probably more positive than it was in 2020 itself.

Thank you.

And the next question comes from Lee Meyer from Lord Abbott.

Yeah, hi. Thanks for taking my question. My question

Hello? Operator?

Just a second, yes, let me see where the connection of Lima is. Give me a moment. Sorry, my line is open again.

Hi, can you hear me? Yes, we can hear you. Can you start again, please? Sure. All right, thank you. My question is in regards to micro LED, which albeit is still a bit in the future, it's a bit of a ways off. But you clearly have technological strength in the Roy market. But, you know, historically, in the blue green market with GAN, it's been a bit of a more of a challenge. from the competition, both out of China. And as you mentioned with Vico, as you, as we move into these, you know, smaller, finer, uh, feature sizes, both in mini, and then more importantly at micro, do you think you can regain your competitiveness, uh, outside of Roy specifically in green and blue or blue?

Yeah, Lee, thank you for the question. Definitely, yes. The requirements for micro-LED are very, very different than the requirements for solid-state lighting LEDs. In all three colors, what is the utmost requirement is the uniformity leading into good yield levels, low defectivity, et cetera, et cetera. This comes together with relatively big wafers, 6-inch, 8-inch wafers. And if you want to do this with acceptable throughputs, we are very convinced, and that's the feedback we're getting from all our customers, the Planetare reactor is the best choice. And we believe we will have all three colors for micro-LED.

Okay. All right, great. Thank you. That was my question.

Okay, ladies and gentlemen, I would like to end this call on a personal note. After 28 years with Extron and 19 years at the Executive Board, I will retire end of March. Looking back at these years, there have been good and less good ones, but all times have been very exciting for me. Even after that long time, I'm still amazed about the technology and the markets Extron is serving, Extron's people, and the great perspective of the company. I would like to thank you all for your interest and support for Extron, and I really wish that you will continue like this, as I believe there is a bright future. Thank you very much, and goodbye.

Thank you, Bernd. I would like to add some personal words to that, what he just said. Bernd, I enjoyed very much working with you, and I will until the end of March. That's for sure. You have pushed and supported me at the same time, and we always discussed our ideas and views very actively, sometimes controversially, but at the end it was always fruitful. In addition to that, we went along very well on the personal level. Therefore, I sincerely regret seeing you go, but I wish you all the best for your time after Extron with your family and whatever you want to do. Thank you, Bert. I have my thanks to all of you for attending. We will be hosting meetings on virtual roadshows in different time zones next month. Please let us know if you're interested in joining. Please note that our next earnings call will be on April 29, 2021 for our Q1 2021 quarterly results. Thank you and bye bye.

The conference is no longer being recorded.