Aixtron Se Unsp/Adr

Ladies and gentlemen, welcome to Extron's analyst conference call Q1 2025. Please note that today's call is being recorded. Let me now hand you over to Mr. Christian Ludwig, Vice President, Investor Relations and Corporate Communications at Extron, for opening remarks and introductions.

Thanks very much, Operator. A warm welcome to Extron's Q1 2025 results call. My name is Christian Ludwig. I am the head of investor relations and corporate communications at Extron. With me in the room today are our CEO, Dr. Felix Grabert, 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 Extron 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 two of the presentation, as it applies throughout the conference call. This call is not being immediately presented via webcast or any other means. However, we will place a transcript on our website at some point 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 all to our Q125 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 our financial figures. Finally, I will give you an update on the development of our business and our guidance. Let me start by giving you an update on the key business developments of the second quarter on slide two. The important messages for Q1 are We have delivered a robust Q125 in a weak market environment and recognized solid new orders of 132 million euros, which lead to an increase in equipment order backlog to 308 million euros. We concluded the quarter with revenues of 113 million. With that, we have even exceeded our guided range of 90 to 110 million. The gross margin came out at 30%, mainly due to a €5 million one-off cost item related to our announced personnel reduction. Adjusted for this effect, the gross margin is at around 35%, slightly below the previous year's 37%. Reasons are a slightly weaker product mix, as well as selected product enhancement for previously delivered G10 series tools. With these results, we confirm our full year 2025 guidance published in February 25. And let me now also add our view on the US tariff policy. Although as of today, our tools are exempt of any tariffs, we are aware that this may change. We are able to manufacture both in continental Europe, namely in Germany, as well as in the UK. This gives us some options to deal with different tariff scenarios. We will closely monitor the impact of the U.S. tariff policies on the global economy and any required measures which may become important for us. Christian will now provide a detailed look into our financials on the following pages before I take over with an update on our markets.

Christian? Thanks, Felix, and hello to everyone. Let me start with the highlights of our revenue development on slide three. We had a good quarter in the weak market environment with revenues at 113 million euros, only down 5% compared to the 118 million last year. We even came out slightly above the upper end of the quarterly guidance range of 90 to 100 million. A breakdown per application shows that 69% of equipment revenues come from GAN and SIG power 17% from LED, and 10% from optoelectronics, and a 4% contribution from R&D tools. The after-sales business well contributed to total revenues with 25 million euros. The after-sales share of revenues grew to 22%, up from 21% a year ago. Now, let's take a closer look at the financial KPIs of the income statement on slide three. I already talked about the revenue line. Gross profit in Q1 2025 was 34 million euros. That implies that our gross margin in Q1 decreased by 7 percentage points versus Q1 2024 to 30%. But please recall, this includes the one-off expense of around 5 million euros in connection with the announced personnel reduction in the operations area. Adjusted for this effect, the gross margin is only slightly below the previous year at around 35%. The two percentage points decline is mainly due to a slightly weaker product mix as well as selected product enhancements to previously delivered chief and series tools. The personnel reduction measure is planned to be completed in Q2 and will result in an annualized improvement of around 5 million euros. This cost reduction will be largely effective in Q2 and fully effective from Q3 2025 onwards on a pro-rater basis. Please note that we will see the effects in the headcount figures slightly later than the cost effects due to the notice period of infected employees. OPEX in the quarter went down to 31 million euros, primarily driven by lower R&D spending compared to the previous year. For the full year, we expect R&D costs to be slightly lower than in 2024. Please do not take the Q1 number as a run rate for the next quarters. EBIT for the quarter was 3 million euros. Again, the decline in the operating result compared to the previous years, mainly due to the lower gross profit as a result of the one-off expenses for the personnel reduction. Now to our key balance sheet indicators on slide five. Working capital was down by more than 30 million euros since end of 2024. Several balance sheet items contributed here. We continue to decrease inventories to now 353 million euros compared to 369 million euros at the end of 2024. And as stated before, we expect further inventory reductions to materialize throughout 2025. Trade receivables at the end of March were at 134 million euros compared to 193 million at the end of 24. The reduction versus the end is mainly the result of the collection of the payments related to the large shipments in the last quarter of 2024. Advanced payments received from customers at quarter end were 51 million euros down about 30 million euros from end of 2024 primarily driven by some cut-off date effects and some regional shifts in the order. Advanced payments represent about 17% of order backlog. The fourth key element of working capital, trade payables, has now come down to €21 million from €34 million at the end of 2024. This well reflects now the fully adjusted supply chain situation with significantly reduced purchasing levels. Adding it all up, our operating cash flow improved in Q1 to 35 million euros, a strong improvement of more than 42 million euros versus last year's negative 7 million euros. On the back of the improvement in operating cash flow, free cash flow improved even more. It came in at 30 million euros compared to negative 33 million euros last year. Improvement was even more pronounced as our capex in Q1 at 5 million euros was significantly lower than last year's number of 26 million euros. This is, of course, primarily due to the now completed investment in the innovation center. Our cash balance, including other current financial assets as of the end of the quarter, increased accordingly to 93 million euros compared to 65 million euros at the end of December 2024. As stated before, our top priority for the use of cash will continue to be the implementation of our strategy. We'll apply core competencies and abilities to markets of high growth differentiation and margin potential in order to sustainably increase the value of the company. And with that, let me hand you back over to Felix.

Thank you, Christian. I would like to continue on slide six and give you an update on key trends in our different markets. There is not much news from the SICK and GAN markets since our previous call. Hence, I will keep this very short. But there are quite some interesting developments in our opto business, which I would like to address before moving to our expectations for 2025. First, a very short update on SICK and GAN power electronics. The recent developments in the electric vehicle market have led to a short-term slowdown in SICK capacity extensions. Customers in the Western world have idle capacities, and we all have heard news about customers even reducing 6-inch capacity and even scrapping tools. In China, our customers continue investing, and we had strong shipments and strong order intake for the G10 SICK into China in Q1 and expect more in Q2. Mid-term, we expect further growth for SICK power devices and hence for SICK deposition equipment worldwide. Silicon carbide wafer prices have come down significantly, and this will result in an even higher competitiveness of silicon carbide devices when compared with silicon IGBTs. Now, let's turn to GAN. In the Western world, we've observed a slowdown in demand for gallium nitride equipment as well. Again, we remain bullish as for the midterm prospects in this segment, because more and more applications are addressed by gallium nitride devices, as we have indicated in recent earnings calls throughout the second half of 2024. In China, many GAN customers nevertheless continue investing also in 2025. We expect strong orders in 2025 for gallium nitride from our China customers. Overall, for both GAN and SICK, our demand in 2025 is expected to be roughly flat compared to 2024. Sales is driven mainly by our Asian and in particular by our China customer base, while European and US demand is much slower this year. Let me now come to OptoElectronics. In OptoElectronics, we are observing an increasing demand for MOCVD tools in data communication applications. We anticipate generate roughly 20% of our equipment revenues this year for this business segment, with a majority coming from telecom and datacom sectors. We anticipate strong demand to continue in 2026 and to grow even bigger volumes in the coming years, driven by three factors. First, the appetite for data, fueled by 5G sensing and AI, is causing bandwidth requirements to double approximately every two years in transport networks. In hyperscale data centers, AI demands are pushing for even higher bandwidth, leading to increased demand for 800 gig 1.6 terahertz optical interconnects. This is driving new invest in optical infrastructure. Second, we observe a growing preference of customers for photonic integrated circuits called PICs, P-I-C's. over traditional discrete lasers. PICs integrate all lasers, modulators, and detectors onto a single circuit, offering higher performance, a smaller form factor, and significantly lower energy consumption compared to traditional laser circuits. The PIC market is projected to reach $41 billion by 2031, reflecting an annual growth rate of about 16%. Third, the integration of more than 100 elements and sub-ticks is shifting manufacturing requirements. At the epitaxy level, all devices must adhere to narrow specifications throughout all epi steps, both on wafer and from campaign to campaign. At the manufacturing level, this integration and increased volume necessitate more precise backend manufacturing, driving the adoption of 150 milliliter indium phosphide substrates compared to the prevalent 100 mm, which was used in the past. Our Extron G10 AST tool was exactly developed with these new requirements in mind and is either already qualified or in qualification at all leading laser suppliers. The tool benefits from several major improvements compared to the previous G4 generations. We are using a four-flow injector, which is delivering a three to four times better uniformity compared to the previous generation. It is the first arsenide-phosphate MOC-VD reactor with in-situ cleaning, which is a game-changer for our indium-phosphate laser customers. It enables them to simply reset the reactor when changing process recipes, For example, foundries which do contract runs for different customers, and they do a batch for one customer and a batch for another customer in the next run. Last but not least, 6-inch inium-phosphate substrates are very brittle, and our cassette-to-cassette solution, developed and matured on our G10 SICK and G10 GAN, is now completing the G10 ASP solution. Wafers are loaded and unloaded directly into the wafer cassettes, without requiring any manual operator handling. This increases manufacturing yield and enhances the customer's manufacturing line productivity. These advantages reinforce our undisputed market leadership in the auto sector. Our recent success with Nokia for the G10 ASP tool highlights our strong position in the segment. Additionally, we have received first orders from a leading global supplier of AI-related applications, and we expect more to come soon. You will hear more from the press releases in the next weeks and months. With this, let me come to an update on our Innovation Center. You recall that the 300-millimeter opportunity is the reason why we decided to invest in our additional 300-millimeter cleanroom, the Innovation Center, displayed on page 10 of the slides. With an investment volume of around 100 million euros, the construction project was completed in record time, just 15 months from the groundbreaking ceremony to commissioning the first installed 300 millimeter deposition system. The next milestone was reached just now in the first quarter. The first 300 millimeter wafer was processed and the innovation center was put into full operation for 300 millimeter gallium nitride development topics. So the Innovation Center project from our side is completed, and now we have handed this over to our development team. With that, let me now move to our guidance. We confirm our guidance for 2025 as published in February. We expect revenues to come in at a range of 530 to 600 million euros. At the midpoint, this would be around 10% below 24. We expect a growth margin of 42 to 41%, and so at around last year's level, and an EBIT margin between 18 and 22%. The guidance for the gross margin and EBIT margin includes one of expenses of around 5 million in relation to the announced personnel reduction in the operations area. The measure will lead to annualized savings in the mid-single-digit euro range in the future, which corresponds to an improvement in the gross margin and EBIT margin of around 1 percentage point. For Q2 2025, we expect revenues in the range of around 120 million to 140 million. Again, as stated before, the implications of the US tariff policies are unclear. As of today, our tools are exempt of any tariffs, but we are well aware that this may change. We will closely monitor the impact of the US tariff policies on the global economy and any required measures in order to find the best solutions for our customers and other stakeholders. With that, I will pass it back to Christian before we take questions.

Thank you very much, Felix. Thank you, Christian. Operator, we will now take the questions, please.

Yes, thank you. Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. In case you wish to withdraw your question, please press 3 and star. Please press 9 and star now to register for a question. And we're coming to the first questioner. And let me just see who we have in the line, just a second. First up is Martin Marandon from AutoBHS. Over to you.

Hi, thanks for taking my question. My first question is about the order intake. Maybe could you give us a bit more color on what exactly drove the solid order intake in QAnon? I know you mentioned customers from Asia for power applications in the press release and also photonics during the call, but I was wondering if it was more photonics than silicon carbide or gallium nitride, maybe, which is a surprise, and also if it concerns a broad range of customers or a small number of customers.

Yeah, thank you very much. So, order intake in Q1 was, in fact, a very big part with silicon carbide, almost 50%. And that one was followed, I think, by 20% by the optoelectronics, which we mentioned. So, this is the two main segments. and the rest is then split across the other applications. And what I also mentioned is China was very big in the Q1 in terms of order intake. I think, if I recall right, followed by some order intake from Japan, also silicon carbide, quite strongly, and then I think the rest was split across the whole rest of the world, to give you rough label and rough indication. And the rest of the world is especially the laser systems. We all know in the laser world, it's not volume and bulk orders. Power electronics, of course, big volumes, many, many wafers, many tools typically on one order, while the laser is typically one, two, three, three tools per order. However, a much broader, much more diverse customer base.

Okay, that's clear. And maybe in the laser segment, you mentioned the transition to 800 gigabytes, etc. But I was also wondering if co-packaged optics and so on, which will be more and more in the next NVIDIA GPUs, has an effect on MOCVD demand at the moment?

I didn't get the question about the copackage. Sorry, I couldn't fully understand.

Yeah, I was wondering about, you know, this new copackage optics and we try to put photonics chips directly on the packaging of AI chips. If, you know, that was driving some kind of also more MOCVD demand for Extron as well, or if it was mostly what you mentioned, so 800 gigabytes transition, etc.? ?

Yeah, thank you. I think it's a very good question. I think we expect to see a very gradual transition. So the first transition, which I mentioned also in my prepared notes, is a transition from 4-inch to 6-inch and essentially from discrete laser devices and modulators and so on now to the integrated devices. That's the first step. So now, essentially, you have an indium-phosphide-based integrated photonics chip, this thick photonic integrated circuit which is being used. And I think today's system, to a large part, are still using discrete architectures. So you have, let's say, a photonics IC, and separately you have the other ICs of your system, but very clearly going towards the future, we will see more and more co-integration of that in a package. For example, a PIC in the package, co-packaged with a GPU, CPU, and memory, and so on, all on a silicon interposer, or potentially, there's some work ongoing on a glass interposer, where very easily you can also form waveguides. So I think it's a gradual transition, but as you indicate, the overall role of optics in the AI and in the data center space is increasing, and By the way, also of power electronics. I think same kind of topic. We see power electronics today as a very separate element, and step by step they will be integrated. So in the end, and it's a transition which will span multiple years as a roadmap. We have seen roadmaps of some of our customers. In the end, you will see a fully integrated package on an interposer, no longer like a PCB, but advanced materials, be it either silicon or glass or sapphire, where in the end the optics for the data exchange and the power electronics for the power supplies is being fully integrated. It's an exciting roadmap.

Okay, thank you very much. And the last one, if I may, it's a quick one, is maybe one for Christian. Just on cost, I was a bit surprised by the increase of SG&A cost in Q1. Just wondering if there was a specific effect that we should be aware of.

Let me try to give you a high-level summary of what happened there. In the selling expenses, we saw an increase, which is related to a little bit of a sharpening of our disclosure. That means in the past, all customer-related lab services were disclosed in the R&D expenses, and now we disclose them in selling costs if they are unpaid or in the COGS if they are paid for. And about two-thirds of the deviation versus the prior year in the selling expenses was due to this effect, and that's just a shift from the R&D cost to the selling expenses, and the rest, about one-third, is due to one of Severance's payments also in the selling area. This is independent of the announced program, the personnel reduction, but also in the selling area, we had... had some severance payment, all fully baked into our fiscal year 25 guidance. On the G&A, a little bit similar. Yeah, we also had there some one-off severance payments, and we had some external services like consulting and insurance, smaller topics, all also fully baked into our 25 guidance. On the R&D cost, well, I mean, Maybe I anticipate a question now, yeah, because you've been asked only on selling in the G&A. Maybe I mentioned also the reduction in the R&D cost. Of course, there's a slight effect in here from this shift from R&D to the selling expenses. The majority of the reduction in the R&D cost is just due to operational reduction of external services.

Thank you, Christian.

The next question comes from Gustav Froberg from Bernberg.

Good afternoon, everyone. Thank you for taking mine also. I'm just too pleased staying on the indium phosphide side. Could you give us an update here on what you're seeing on the competitive side? I mean, who are you meeting in competitive discussions when selling the G10 ASP tool? And then on the build-out, just a timing question around mass manufacturing here. Is this something what you're seeing right now and there's a build-out ongoing or is this something that we should expect more for 26, 27? Thank you.

Thanks. Thank you very much for the question. So on the international customer, from the competitive side, of course, we meet our competitor, Vico. However, most of the customers have made their decisions and selected the G10 AST as I've indicated in my speech. So the tool is really having a fantastic track record and leaves many happy customers and we get really quite outstanding feedback. Very nice. In terms of the volume ramp, which I was indicating, we believe that the volume we are seeing is now certainly an indication of a volume for 25, 26 And from then onwards, we expect further growth towards 27, 28. And we can imagine that maybe 27, 28, the volume may increase 50% compared to where we are today, and maybe towards the end of the decade, maybe even double from the tool shipments that we see in this year. Just to give you a rough outline on the trajectory that might unfold.

Great. And just a final follow-up here. So what you were talking about today, is this something that came as a surprise to you or is this something that you've obviously been working on for quite some time and it was only a matter of time for it to pop up or is this kind of popped up a little bit out of nowhere?

Well, it's always very difficult for us to predict an exact timing of things. I think, unfortunately, you've heard the answer from me already several times. But in fact, it's something that we have been working and from a strategic level, we have been preparing that. First of all, we've been preparing that with a tool, with a G10 ASP tool, because we saw the requirements in going into that direction and the strategy has played off very well. This is good. The product strategy has worked out. And we also have expected this market to pick up. We were actually quite surprised because we looked at all the data and the projections about that data demand and AI and communications. I mean, we all know this kind of the same data. And we've been wondering for quite some while, hey, when do we see it translate into actual orders? And well, it seems now really to be the point. And I think one reason for the delay was customers in this area undergo a very long and very in-depth qualification and design in cycles. Because the customers of our customers, be it either the data center operators, but our customers typically then also serve the optical network operators. they have extreme high qualification barriers. Because you imagine, if such a device then also gets into undersea cables or whatever cables which are buried underground, you don't want the stuff to fail, but you rather want this to operate and then to operate for 15, 20 years in a row. That's the reason for this long qualification cycle. And essentially, we've been literally working for over two years with many customers on qualifications, on demos, on a demo tool with a customer, customers coming into our lab, repeated group cycles, you can imagine. And now it's really the time that multiple of our customers are through the cycle. And now this is translating after the selection and qualification period is done into actual order volumes.

Great. Thank you.

Next up is Madeleine Jenkins from UBS. Yes.

Hi, thanks for taking my question. My first one is just more housekeeping. Within your power revenue line, what was your silicon carbide gallium nitride split last year and kind of roughly where do you expect it to land this year? Thank you.

I think it's both about 50-50 last year and this year and overall flat in total volume.

Okay, perfect. Thanks. And then just my second question is on the Your demand you're seeing for your silicon carbide in China, I just wondered how you see that going into the rest of this year. We're hearing some news around potential consolidation of customers there, and I just wondered if you're seeing any of that and whether you expect that to impact your order book. Thank you.

Well, we have a very, very strong silicon car by China business in the first half. That's what we clearly can see both from the orders already placed and also the shipments projected. I think China for us in 2025 would be clearly stronger in the first half than the second half. But you never know, especially in China, how things unfold. It could also very well be that in the summertime, additional opportunities materialize, which we don't have on the radar yet. But for sure, I would say as we speak today, my best projection I can give today is much stronger first half compared to second half.

Very helpful. Thank you.

The next question comes from Michael Kuhn from Deutsche Bank.

Yeah, thanks for taking my questions. Essentially, a follow-up on the last one. So in Q1, I guess, equipment orders were in the area of 105 to 110 million, and you still need 140 to 210, let's say, in terms of short-term orders to reach the guidance. So I would say you need to keep that 105 to 110 order run rate over the next five months or so to be able to deliver on it. So in that context, what was the start into the second quarter? You obviously mentioned sitting carbide, Chinese customers ordering strongly, but let's say what else is in the pipeline and what, let's say, order appetite do you see in the market right now, also given, let's say, macro uncertainties?

A very good question. I think overall, I would like to put up front, we see ourselves confident to fill those 140 to 210. We clearly have it on the radar. And we spoke to our regional teams and our sales teams and verified that, of course, up front to this call, to double check, is it still up to date? And we can clearly confirm that based on the pipeline that we see. I think that's a very important message. And please also recall that Just as a context, you probably have it on the radar, just want to make sure that everybody has it. We are still on a pretty high level of inventory as we speak today. We have a clear target to reduce that. But due to the high inventory situation this year, we expect that we will still be able to ship tools before December 31st to convert into 25 revenue with, I would say, orders still received August, September, something like that. If all the parts are literally sitting in inventory, it's only about putting the tool together, testing it, and shipping it out. This is a luxury situation, luxury in the sense of short shipment time. Of course, not luxury, I would rather have the capital work for me and make interest than be in the warehouse, but that's a different topic. That's clear. That's the context. I think for the cutoff of until when we can collect orders and convert to revenue, ballpark you can say mid or end of q3 that just up front now to the second implied part of your question where where do we expect the revenues to come in um we expect in the in the in the second quarter so to say looking into the pipeline still quite some strong power electronics yeah some silicon carbides but also some gallium nitride again also china gallium nitride is ordering quite quite on a quite healthy level i would say yeah in the second quarter I mentioned that in my speech. We expect some volume to come from the laser and data comm area. That was indicating to additional customers. We expect some of the orders to come in or have come in already and coming in in the second quarter. So this is a trend which carries us strongly also in the second quarter. And I think throughout the year, power electronics is continuing, as we said, about on the 2024 level. It's no growth, but at least it's flat. Towards the end of the year, also some other regions returning. And then I think in the second half of the year, we also expect some LED slash microLED orders to come in.

Excellent. Thank you. Then one brief on R&D. Kristin, you stated that Q1 shouldn't be taken as a run rate. I think initially the statement was that R&D expenses will be down by mid single-digit or million amount in 25 versus 24. That is basically the number that was delivered in Q1 already. So will it be a little more, or will we be kind of back to Q2 to Q4 24 run rate for the remainder of the year, just to get a little better feeling on the development of that cost item?

Yeah. Michael, thanks for following up. Maybe I was not completely clear. I mentioned Q1 should not be taken as the run rate for the full year. Because there were also a few positive and negative one-off effects in there, so don't take that one as a run rate. For the full year, we expect a slight decrease compared to the prior year in the R&D expenses. As we have indicated in the full year results communication prior. Is that clear now, Michael?

Yeah, yeah, no, no, absolutely. This is how I understood it, but just wanted to clarify whether there should be any other non-recurring factors to be seen there. One more on the Italian factory. Obviously, you have laid off some production stuff as of late. And I think the Italian factory is not necessarily needed in the short term. Any changes to your planning there?

No, it's in sleeping mode. And your question indicates it's in sleep mode right now.

Okay. And then last question. On the gross margin, you mentioned G10 tool enhancements for tools that were already delivered. So you delivered, let's say, some upgrades to clients. Is that all done or anything else to follow later in the year?

I think 90% is done. So there was a special Q1 effect, a one-time effect.

Perfect. Thank you very much.

Very good.

The next questioner is Ruben Davis from Kepler-Ferro. Over to you.

Yes, good afternoon. Thanks for taking my questions. I just had one briefly on the order breakdown by region. I was curious whether you were willing to share sort of the within power electronics What was sort of the share by region? Let's say China versus Western demand. Not specifically for Q1 orders, but let's say for the backlog I would be most interested in. Yeah, that's the first question.

Honestly, I don't have the breakdown, I have to say. However, I can indicate, I mean, we said there's quite some strong China and Silicon Carbide, so I think China and Silicon Carbide would be a big one. But I don't really have the data in front of me.

Okay, fair enough. And just a logical follow-up, I guess. I mean, China has certainly helped you in the last year. With the West maybe down somewhat, I guess the demand you've been seeing from Asia and China specifically has been ongoing for quite some time. So the logical question would then be, you know, how sustained do you think that could still be? I think... sort of the silicon carbide substrate pricing seems to have been, uh, stabilizing, uh, six inch, uh, you know, prices have come down strongly, but now they seem to be stabilizing. I think EV penetration ratio, we can discuss on that for a long time, but, um, yeah. How do you just, uh, assess, let's say the Chinese capacity ramp at this point, uh, how sustained do you think that is?

Yup. Um, the, the, the, the silicon carbide, it's, it's, it's a good point that you, you come to this topic. Yeah. The strong silicon carbide price decline is actually helping a lot the overall penetration of silicon carbide in the market. Because if you look at a finished silicon carbide device, the substrate cost or the part of the substrate is quite significant of the total cost. And now as the substrate price is going down, overall silicon carbide power devices are getting much more affordable. That means they become much more competitive compared to IGBT devices, for example. And then a customer, let's say an automotive car maker, an ODM, is looking at the whole topic at system cost level. And he's not looking at the chip cost, where of course silicon carbide is more expensive than an IGBT, but he says, oh, silicon carbide is now getting significantly less expensive because And with silicon carbide, I can use a smaller power module. And with silicon carbide, I'm much more efficient, so I have much less heat, which I have to remove. That is my overall system cost, including the cooling system, water cooling, blah, all the metal stuff and so on. It's also getting cheaper. And that helps overall, in short... The penetration or the the share of silicon carbide in the electric in the electric drivetrain, but also beyond automotive So overall you can take away that the silicon carbide price decline I would say will be a key driver for an acceleration in the number of wafers silicon carbide wafers, which is being produced and And the market share that silicon carbide will take away from the overall power electronics is growing. And that means in the end, for us as an equipment maker, it's helping to drive and to stimulate overall equipment demand in silicon carbide. So we very much welcome the price decline of the silicon carbide substrates.

All right, that's very helpful. Thanks a lot. I just had a final technological question. Do you anticipate sort of any shift in epitaxy equipment demand tied to advanced packaging requirements? I mean, thinking about these chiplets or 3D integration, I think you also already talked about the optoelectronic side of things. But yeah, are there any shifts we should be aware of in terms of epitaxy equipment?

We don't see any impact on our side. As you know, we are involved in making equipment for the deposition of layers on something. And we anticipate, we discussed that for the optoelectronics, and we also discussed potentially AI and gallium nitride power electronics. But you will still need to make the chip, which then at some point gets integrated into something else. We are not involved ourselves in the integration. This is mostly the guys who's doing, for example, the wafer bonding is a very important step. Or other people of making backend equipment and Extron is not part of this part of the value chain. And also we don't intend to go into that part of the value chain. But we are still, it overall helps. This is how we see it. It helps overall stimulate and drive demand. We are connected to the applications. We touched on power for AI and Datacom for AI. So it's a driver and a stimulator for the demand of our equipment, but we are not directly impacted by this.

All right. Thank you very much.

And next up is Malte Schaumann from Warburg Research. Over to you.

Yes, good afternoon. This one is a game I tried. Do you have any visibility for kind of an uptake in demand going through the year? Is that something which remains a bit subdued at the moment and would rather be expected than for next year, early 26?

Yeah, a good question. Unfortunately, visibility outside of China is very low. As I indicated, China in 25 is running well, continues to build out capacities. But outside China, the visibility is simply very, very low. And I think the whole world is also looking now what's happening with this whole terrorist stuff. What impact does it have on the economy? And I think only when that kind of stuff is clear, then we'll really see more clarity on that one. I don't have a perspective, I honestly have to say.

Yeah, okay. Then a second question on inventory levels. I mean, you earlier indicated that you expect to be... done with your inventory correction at your side during the year, during the first half of this year. Inventories came down only quite marginally towards the end of the first quarter. So what's your take on the inventory levels going through the year? Do you still expect to be done, let's say, at the latest by the end of this year?

Yeah. And the reason why the effective overall resulting number was just down a little bit from year end 24 until now is that there was still quite some numbers of inventory and placed orders were coming in. That's the reason. Now, those orders which had been placed, yeah, and at some point, you know, there's just no point to cancel something and pay a cancellation fee. I mean, all our products are up to date, you know, our product portfolio, right? There's no product which is getting towards obsolete, yeah? So, of course, we then rather take it and keep it in the inventory and ship it some quarters later, so to say. But that part of inventory or a part which we don't need but the still incoming is, so to say, now over that period. So we are just now, I would say, starting the period where we are looking at net inventory outflows and net inventory reductions. And towards the end of the year, of course, it always depends a little bit on the product mix. Is it coming exactly as we expect or is it coming a little differently? I would say expect inventory levels between 250 and 300 million euros.

Yeah. Okay. Makes sense. Thanks.

The next question comes from Martin Jungfleisch from BNP Paribas. Over to you.

Yeah, hi, good afternoon. I just have a follow-on question on gross margins. I mean, these were quite weak even if you strip out the 5 million restructuring charge. You mentioned product mix and these other product effects, but when you looked at, I think the power share was higher, also FX, probably a small tailwind. Could you quantify this specific G10 product spec headwind more specifically? And then would you expect gross margins back over 40% in the second quarter, or would gross margins in general be more back-end loaded again this year? That's the first question, please.

Well, I'll take that question. We don't quantify exactly the amount here on the upgrades here, but the product mix effect was primarily driven by a large share of shipments to China, especially for old series that came in at quite low margins. Of course, that is fully baked into our full year guidance. So logically, you can expect an uptick in the gross margins throughout the year could be back-end loaded, yeah, just similar pattern like last year.

Okay, no, that makes sense, thank you. And the second question is just on order backlog and just on the, have you seen any order cancellations during the quarter? So when you do the delta between orders and equipment revenues, is it mainly Forex related, the delta? Not in the first quarter.

We have seen some push-outs that was there from earlier in the year towards back-end loaded of the year, yeah, just to say that we've seen but there was no cancellations in the first quarter. We had a little bit in the Q4 of last year, but not this one.

Cool. Sounds good. Thank you very much.

And next up is Daniel Scafi from Citi. The line is yours.

Hi there. Thank you for taking my question. Basically, I was just wondering regarding guidance, given that you still expect some demand to come in the second half, just trying to understand what are your discussions right now with customers, given that we have all of this uncertainty in the macro picture? Do you have regular updates with those customers, and are they kind of sustaining their view that the order should come in in the second half? Or do you potentially already hear some softening in their tone?

No, we have not heard that. So I think this effect of customer, let me say, customer interest, or I don't know how to word it, yeah, So to say getting getting weaker. I think that's that's what we seem to what the end of the of 2024 Especially I think what you are alluding to is also the big Listed Western power electronics customers. Yeah, I think we all know the pictures about what's the what's the what's the backlogs? What's the capex? What's the capex reduction plans? Yeah of the major power electronics players whether this is a TI, analog, Infineon, STMicro, OnSemi, and so on and so forth. I think this is what you're alluding. Those guys, of course, are not ordering at this point in time. I think this is very clear. I think they are showing to their shareholders to really reduce, so to say, the capex and fill the unused capacity. So the demand at this point in time is coming, of course, from customers who really need the tools, right? And we spoke about the laser domain. We also expect throughout the year some red LED, micro LED to come. I mentioned silicon carbide from Asia and gallium nitride also from Asia to a big part from China, but not only China. So this is where you see still customers who continue and who have a perspective on the market and who have a perspective on their customers against where they say, hey, I'm entering this business segment now, or I'm expanding because I see this and this business opportunity. Let's recall, in China, the tech industry is booming, the EV industry is booming, and there's people who have a connection to their customer base where simply tools are needed for an expansion. I think the world is really running at two different speeds at this point in time. The news flow around us is really in the world, which is slow, but there's also the other world, which is continuing and continuing to expand.

Right. Thank you very much for the color. Just to expand on the Chinese demand, given that you already alluded to this, that the first half should be stronger than the second half. Can we understand in a way that there's potentially kind of pull-in demand, given all of those uncertainties? And is there a risk that the Chinese demand will kind of not fall off a cliff, but kind of drastically reduce in the second half? Is that correct?

No, I don't see that as any geopolitical-driven topic. If I talk to my customers, there's a clear demand. There is markets behind it. So I don't see it as political-driven ordering, how I would phrase what you are alluding to, if at least I understand your question right now. So, as I really see it, it's demand and market driven.

Perfect. Thank you very much.

And the next question comes from Basil Tarzu from Metzler. Over to you.

Hi, Basil Tarzu from Metzler. Thank you for squeezing me in. I have two questions. The first one would be around your opto-business and your comments. You said that 2027 business could grow 50%, 2028 similar range, and then by the end of decade even faster. I was wondering in your opto-business, when you comment on that, it's not the total opto-business, right? I guess you're referring to the Datacom business And how big is your Datacom business today?

That's a very good question. You have exactly inferred right. I was referring to the Datacom business. That's perfectly the right indication. Let me just give you an indication. I think the Laser and Datacom, which we put together, this year, as I mentioned earlier, is about a little less than 20% of the equipment orders that we expect for the full year. You have our guidance, so you can do the math, so to say. And on top of that comes, of course, the red LED business and the micro LED business, which follows completely other or different end market dynamics. The red LED, if you recall, is mostly driven by lighting applications and mini-LED applications. And I think micro-LED, we all know, is, again, a very sophisticated high-end application, which is still in the preparation, which we expect also to pick up at some point in time. But I think we spoke about in our previous earnings calls, nobody knows the exact timing for the micro-LEDs. Yeah?

And then the second one also related to this topic, I think you mentioned the second customer win, and it is related to AI, if I understood correctly. Can you give a bit more color around what type of application or use case will be for the second customer?

It's also Datacom, but it's one of the established data communications photonics players, so to say. But we know exactly that this is in conjunction with one of the major AI players, so to say, to literally drive the optical data exchange between chips in the platform. So that's the application. And the customer is one of the established photonics or optoelectronics players Because in this business, you really need to have decades of experience and order. So nobody would just, as a newcomer, enter that field. This would be very naive and blue-eyed.

Okay. Sorry for the confusion or my misunderstanding, but it would be not the co-packaged optic that you integrate that on the package level. It's more for the data transfer, right, between servers or server racks. So basically the old road of cabling where you use this technology or the customer will use this, right? It's not the co-packaged optics module.

I have to admit that I don't know exactly what the plans of my customer are to this level of detail. I have to say I'd rather leave it at this point. I may mislead you otherwise.

Yeah, no problem. And then really a final one. Regarding your LED business, I think Q1 sales was quite good, but I was wondering if you can give a bit of color around the mix in the order backlog, how much LED business is left there.

Honestly, I don't have the numbers ahead of me. I think for the full year, we expect something roughly on the order of 10% of total revenues for the LED and microLED. So it's a decent portion for the year, but it was more in the years before, and it will be more in years to come. It's a solid contribution.

Thank you very much.

There are no further questions.

Well, then thank you very much, operator. Thank you all for listening and thank you for your questions. The IR team is at your disposal if any questions still pop up or are unanswered. And with that, I wish you all a great – well, we have a holiday tomorrow for those who don't have it, a good week, and we'll talk to you at the latest with our Q2 results end of July. Thank you and goodbye.

Your conference call has come to an end. Thank you for attending. Goodbye.