Aixtron Se Unsp/Adr

Ladies and gentlemen, welcome to Extron's Analyst Conference Call Q3 2025. Please note that today's call is being recorded. Questions can only be asked via telephone. If you wish to make use of this option, please ensure you dial in by phone. In this case, we recommend muting the webcast during the Q&A session. Please check your registration confirmation for dial-in data. Let me now hand you over to Mr. Christian Ludwig, Vice President, Investor Relations and Corporate Communications at Extron, for opening remarks and introductions.

Thank you very much, Mrs. Brunner. A warm welcome also from my side to Extron's Q3 2025 results call. My name is Christian Ludwig. I'm the Head of Investor Relations and Corporate Communications at Extron. With me in the room today are our CEO, Dr. Felix Trabach, 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 one of the presentation document as it applies throughout the conference call. This call is not being immediately presented by a webcast or any other medium. However, you 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 to our Q325 results call. 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 first start by giving you an update on the key business developments of the second quarter on slide two. The important messages for Q325 are Our free cash flow in the quarter was 39 million, totaling 110 million in the first nine months, 25, while inventories are down to 316 million, coming from 369 million at the year end 24. This shows we are well on track with our strategy to rebuild our cash provision after we had depleted that with the construction of our 300 millimeter clean room, the innovation center in the years 23 and 24. In Q3, we recognized new orders of 124 million, which lead to an equipment order backlog of 287 million, where we have achieved a book-to-bill of 1.04. We concluded the quarter with revenues of 120 million euros. With that, we were in our guided range of 110 to 140 million. The gross margin reached 39% in Q3 and averaged 37% in the first nine months. This figure includes a one-off expense related to our implemented personal reduction earlier in the year. Adjusted for this effect, the gross margin after nine months came out at 38%, slightly below previous year's 39%, mainly due to volume shifts and FX headway. As the market remained soft, we had to adjust our fiscal 25 guidance two weeks ago. We are now expecting revenues in the range between 530 and 565 million euros, which corresponds to the lower half of the initial guidance, 530 to 600. And a gross margin of now 40 to 41%, down from previously 41 to 42%. And an EBIT margin of now around 17 to 19%, from previously 18 to 22%. AI continues to be the main end market driver, especially for our optoelectronics segments. Automotive-driven power electronics demand, on the other hand, remains soft. Christian will now provide a detailed look into our financials on the following pages before I take over with an update.

Christian.

Thanks, Felix, and hello to everyone. Let me start with the key points of our revenue development on slide three. In a soft market environment, we achieved revenues of 120 million euros down versus the 156 million last year, but well in the guided range of 110 million to 140 million euros. For the first nine months, revenues came in at 370 million euros down about 9% year-over-year. A breakdown per application shows that 66% of equipment revenues after nine months come from GAN and SIG power, 14% from LED, 16% from optoelectronics, and a 5% contribution from R&D tools. The after-sales business contributed to total revenues with 80 million euros. The after-sales share of revenues after nine months was up by two percentage points year-over-year to about 22%. Now, let's take a closer look at the financial KPIs of the income statement on slide four. I already talked about the revenue line. Gross profit decreased year-over-year in Q3, 25 to 46 million euros. Gross profit in the quarter was negatively affected by approximately 8 million euros due to volume shifts from Q3 into Q4 and around 2 million euros due to FX effects. Subsequently, the gross margin in the current quarter came in at 39%, down four percentage points versus the prior year. After nine months, gross profit was at 136 million euros, 15% below last year's figure. At 37%, our gross margin after nine months was two percentage points lower than after the same period last year. But please recall, as stated in our Q1 release, This includes a one-off expense of a mid-single-digit million euro amount in connection with the implemented personnel reduction in the operations area. Adjusted for these effects, the gross margin after nine months would be at around 38%. For the remainder of the year, we calculate with an average US dollar-euro exchange rate of 1.15 and a continued weakness of the Japanese euro rate. Due to high expected revenues in foreign currency in Q4, we expect an additional around 3 million negative impact, euro negative impact in revenues in gross margin, with the larger part resulting from the US dollar and the smaller part from the Japanese yen. Together with the above-mentioned 2 million euro effect realized in Q3, this totals to approximately 5 million euros negative effects impacts which corresponds with the one percentage point gross margin adjustment of our guidance. OPEX in the quarter were slightly up by 4% year-over-year to 31 million euros, primarily driven by higher R&D spending compared to the previous year. For the first nine months, OPEX came in at 94 million, a reduction of minus 6%, driven primarily by around 13% lower R&D expenses. R&D expenses were down mainly due to reduced external contract work and consumables costs. As stated before, invisible in Q3 numbers, R&D costs in H2 will be higher than the H1 number. So for the full year, we expect R&D costs to be slightly lower than in 2020. Ebit for the quarter is 15 million euros. a significant drop versus Q3 2024. The main drivers, besides the already mentioned negative factors impacting gross profit, is the negative operating leverage effect resulting from lower revenues. The weaker performance in Q3 led to an EBIT of 42 million euros for the first nine months, a decrease of 30% EOE. This translates into an EBIT margin of 11%. Again, please recall the one-off expense in connection with the personal reduction mentioned before. Adjusted for this effect, the nine-month EBIT margin would be at around 20%. Now to our key balance sheet indicators on slide five. On a more positive note, working capital has continued to come down by around 100 million euros since end of fiscal year 24. several balance sheet items contributed here. We continue to decrease inventories to €316 million compared to €369 million at the end of 2024. Year-over-year, inventories have been reduced by €111 million as we continue to work through the surplus accumulated last year. And as stated before, we expect further inventory reductions to materialize throughout 2025. and into 2026. Trade receivables at the end of September were at 129 million euros compared to 193 million at the end of 2024. The reduction versus yet is mainly the result of the collection of the payments related to the large shipments end of 2024. Advanced payments received from customers at quarter end were at 33 million 73 million euros, a nice recovery of about 20 million versus end of last quarter, but still down about 9 million euros from end of 2024. This is primarily driven by some cutoff state effects and some regional shifts in the order book. Advanced payments now represent about 25% of the order backlog. The fourth key element of working capital, trade papers, has now come down to 24 million euros from 34 million euros at the end of 2024. This reflects the now fully adjusted supply chain situation with significantly reduced purchasing levels. Adding it all up, our operating cash flow after nine months improved to 128 million euros, a strong improvement of 100 million euros versus last year's 28 million. On the back of the improvement in operating cash flow, free cash flow improved even more. It came in at 110 million euros after three quarters compared to negative 58 million euros last year. This was supported by a strong reduction in our capex. With 18 million euros after nine months, our capex was significantly lower than last year's number of 86 million euros. This is primarily due to the now completed investment in the innovation center. As of September 2025, our cash balance, including other current financial assets, improved to 153 million euros. This equals an increase of 8 million euros compared to 65 million at the end of fiscal year 2024, despite the dividend payment of about 17 million euros in Q2. As stated before, a key priority remains the rebuilding of a strong cash process. Our financial decisions continue to be guided to ensure a robust liquidity foundation for the future. This has served us well in the past, and we see ourselves well on track towards this target. With that, let me hand you back over to Felix. Thank you, Christian. Let me continue with an update on key trends in our different markets, starting with optoelectronics and lasers. In autoelectronics, Exron has seen a continued recovery in demand for Datacom application, which began earlier this year and has been reaffirmed in Q3. This trend is expected to continue into 26 and beyond. Our customers are increasingly transitioning to 150-millimeter indium phosphate substrates and photonic integrated devices, PIC devices, requiring advanced epitaxial performance. The segment is technology-wise very demanding. It requires excellence in uniformity, doping control, and defect management, areas where our G10 ASP platform excels. Historically, Extron has held a market share of over 90% in this domain, served by our G3 and G4 planetary reactors. The G10 ASP is now establishing itself as the tool of record in the laser market, replacing legacy systems at leading customers. Q3 shipments and scheduled Q4 deliveries underscore our strong market position with repeat orders from key customers such as Nokia. Additionally, VIXL demand is recovering, driven by LiDAR modules in automotive applications. We therefore expect that tools for the various laser applications will contribute significantly to our full-year order intake and also into next year, 26. Now let me move on to our LED business. We are seeing first encouraging signs of reinvestment in red, orange, yellow ROY LED applications. Utilization rates for red, orange, yellow LEDs have been high throughout the year with double-digit system shipments for mini-LED applications driven by demand for RGB fine-pitch displays. Notably, some TV manufacturers, such as Samsung, are shifting to full RGB backlighting, boosting micro-LED demand. While overall micro-LED demand remains moderate, medium-term drivers are positive. We received multiple orders for our G10 ASP platform, primarily for red-pixel production in next-generation AR devices. The recent announcement of Metas AR glasses based on micro-LED technology signals a broader trend with more OEM products expected in 27 and 28. Our G5 Plus and G10 ASP platforms are ideally suited for these applications, which require ultra-small pixels and defect-free epitaxial dye. The launch of Garmin's first micro-LED watch is likely to further stimulate demand across blue, green, and red micro-LED sectors. In solar, after years of moderate investment, we are now seeing renewed interest, including multiple orders for low Earth orbit, LEO, L-E-O, satellite applications in constellation projects. LEO satellites are those that orbit the Earth at altitudes of about 2,000 kilometers. They enable both fast communication as well as high-resolution Earth observation by operating in a zone just above the Earth's atmosphere, where they can maintain strong signal connections with ground stations. These satellites work in interconnected constellations of hundreds of thousands of satellites, of hundreds or thousands of satellites to provide global coverage. Examples are Starlink or OneWeb. We anticipate this trend to continue in the years 26, 27, and 28. Let me now come to gallium nitride power. Extron continues to lead its gun power segment with over 85% market share across all wafer sizes and power ranges. Although demand is softer compared to last year, we are seeing solid volume orders for both 150 and 200-millimeter solutions, particularly from Asian customers, with ramp-up plans extending into 26 and 27. We've also strengthened our partnership with IMEC, Together, we are accelerating innovation at both the application and device levels. IMEC has been using both our G5 Plus as well as the G10 GAN platform for its 150 and 200 millimeter partner programs for quite a while. And we have now shipped a 300 millimeter gallium nitride platform to enable broader access to IMEC's recipes. We see first power semiconductor manufacturers adopting 300 millimeter GAN technology such as Infineon technologies. Regarding the overall GAN market, we're still dealing with a moderately oversaturated installed base, requiring some more time to absorb existing capacities. This digestion phase is expected to continue for some quarters before a broader recovery sets in. With that, let me come to silicon carbide. While end-user demand remained soft, we observed moderately increased utilization rates at some of our customers. On the one hand, this is due to new EV models being launched, which drive demand. On the other hand, SIC is starting to enter the AI data center value chain, especially in voltage classes of 1200 volts and above. You have seen the new NVIDIA power architecture, which relies exclusively on wide bandgap power devices. At the International Conference for Silicon Carbide and Related Materials, in short, ICECREAM, in Busan, Korea, early in Q3, various industry players confirmed mid-term adoption of super junction silicon carbide technology. This technology basically means that instead of one thick silicon carbide epilayer deposited today, We will see in the future multiple thinner silicon carbide epi-deposition steps. These thinner epitaxial layers require enhanced uniformity and shortened process time. Our G10 silicon carbide platform is well positioned to meet these needs, offering superior productivity due to the benefit of the batch concept, especially for thinner layers. We are proud to have shipped our 100th G106 CBD system, marking a major milestone in reinforcing our leadership in the silicon carbide power segment in this quarter. The silicon carbide market is still undergoing a longer digestion period, particularly in Western-oriented regions. As a result, there are no major decisions for new FAB investments on the agenda these days. In summary, we can say that the soft market period still continues in almost all markets apart from the laser market, driven by the hunger for data from AI applications. A demand pickup will not materialize in 25, and visibility in 26 is still limited. With that, let me now move to our guidance. Due to the market situation just described, we had to adjust our guidance for 2025 two weeks ago. Based on the current soft market environment and assuming an exchange rate of 1.15 US dollars per euro for the remainder of the year, we now expect the following outlook for 2025. We expect to generate revenues in the range between 530 and 565 million euros. which corresponds to the lower half of the initial guidance, which was initially 530 to 600 million. FX effects led to an approximately one percentage point reduction of gross margin and EBIT margin. As a result, we expect now a gross margin of around 40 to 41% and an EBIT margin of around 17 to 19%. The guidance for the gross margin and EBIT margin includes a one-off expense of a mid-single-digit million euro amount in the relation to the implemented personal reduction in the operations area earlier this year. The measure will lead to annualized savings in the mid-single-digit million euro range in the future, which corresponds to an improvement in the gross margin and EBIT margin of around 1%. As previously stated, we expect our tools to remain exempt from U.S. tariffs. However, we continue to closely monitor the impact of U.S. trade policies on the global economy and stand ready to implement any necessary measures to ensure the best possible outcomes for our customers and stakeholders. Let me at this place also give you a first outlook for the next year, 2026. We clearly see that the medium and long-term drivers for EXTRON's growth, such as demand for GAN and SICK power devices, LED and micro-LED applications, lasers, and LEO solar applications remain intact. However, visibility for the fiscal year 26 remains low. And as of today, we do not see signs of a demand recovery yet. Therefore, our view today is that, 2026 revenues are likely to be slightly below those of 25, maybe flat. Furthermore, assuming an exchange rate of 1.15 US dollar per euro, we expect the EBIT margin not to come out below the range of the current year, maybe better. As always, we will give you a firm guidance with the release of our financial year result end of February 26. With that, I'll pass it back to Christian before we take questions.

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

Yes, thank you. Ladies and gentlemen, we will now begin the Q&A session. If you would like to ask a question, please press 9 and star on your telephone keypad. Please note, questions can only be asked via telephone. If you wish to make use of this option, please ensure you dial in by phone. In this case, we recommend muting the webcast. Please press 9 star now to state your question. And the first question comes from from . Over to you.

Hi. Good afternoon. Thanks for taking my question. I just wanted to touch upon your final comments on 2026 to start off with. You said that 2026 is likely flat or down, but it sounded like you expect to be And your trend, when I look at your Q3, GAN seems to be doing quite well, while SIC is down quite sharply. So would it be fair to say that at current visibility, you would expect OCTO to be up, SIC to be down, and GAN to be somewhat flattish? Is that a view that would be sort of the preliminary view for next year?

I think you've got a perfect read on this one. Let me try even to quantify it for you. I think roughly in terms of percentage of revenues, we expect a percentage of total revenues next year, we are expecting to gain about 10 percentage points for OCTO, 10 percentage points gain for GAN, and minus 20 percentage points in silicon carpet. So a pretty weak year for SICK. but very strong yield for the optical segment. There used to be a smaller segment, so adding 10 percentage point of the total is quite a significant one. This also helps on the margin. You have seen my comment related to margin quality and GAN also as a percentage gaining a bit.

Understood. Thank you. And then just a follow-up. On the SICK side, yeah, I understand that demand is quite weak right now. There's quite a bit of supply out there, and automotive is still sluggish. But, you know, listening to companies like STMicro and all who are under quite severe margin pressure on the silicon carbide side, they seem to be accelerating their 6-inch to 8-inch transition because they see that as a way to improve their profitability. And ST specifically said that they'll do it through the course of 26 and by early 27. I would assume that that would be true for other parts of the installed base as well, given the price pressure in silicon carbide. Do not see this as a driver at all for your silicon carbide revenue. and do you really need the end demand to recover before any improvement happens?

I think you catch it very well. Yes, the six- to eight-inch transition is going very fast, especially outside of China players. I think worldwide outside of China we see the six- to eight-inch transition progressing at rapid speed, as you have indicated with one company name, and we see the same in other players. In fact, we do hear from some of our customers that, While end customer revenue is flat or down, the unit numbers are going up. And unit numbers is, of course, what we as an equipment maker like, yeah, because in the end, it's about wafers and increasing numbers of wafers, yeah. So, in fact, we expect that by the end of 26, the transition in the Western world, as I may call it now, including Japan, is probably concluded 27, 28. I would expect the volume to be completely going on 8-inch. We do see on 8-inch also much better quality wafers, which helps the customers in terms of yield. That's one of the cost reduction drivers. Also, 8-inch substrates are getting good pricing now. Initially, they used to be very expensive. Now, the pricing for 8-inch substrate is going well. And that, at some point, means the excessive overcapacity that I was speaking about, At some point, it will be digested. I would not dare at this point to give an exact prediction because there's multiple variables that we are just discussing. But I think we can clearly see at some point the overcapacity will be digested and that there will be new demand.

But that transition doesn't mean buying new 8-inch machines from you to generate revenue for you?

At some point, it will mean buying new demand and new tools when the existing overcapacity is consumed. Right now, we talk about existing overcapacity, which is just being converted.

Got it. Understood. Thanks.

Next up is Martin from AutoBHF.

Hi. Thanks for taking my question. on something that you put on the press release on gallium nitride. You talked about utilization rate rising in data center, and I was wondering what does it mean exactly? I mean, does it mean that you already anticipate orders in the near term linked to the new 800 volt architecture from NVIDIA? Does that mean something else?

Let me explain what we mean by that. Thanks for the question. What we have seen is we have seen in the years, especially 23 and 24, we have seen quite a number of gallium nitride orders, which were happening a bit ahead of the wave, such that I would say early 25, at the existing volume customers, we have seen quite a significant overcapacity of installed base also in gallium nitride. That was the reason why in 25, compared to 24, our gallium nitride shipment has been slowed down quite a bit, because our existing and established volume customers literally had also in GAN, not only in SICK, but also in GAN, some overcapacity to be digested. So as we started into 25, and some of our customers also in gallium nitride, we've seen installed base utilization to be quite low. Now, towards the end of 25 and looking into 26, we see that a much larger fraction of the installed capacity is being utilized at the existing GAN customers, while those who newly entered the GAN market in 24 and 25, in previous earnings calls, you may have recorded that we said, well, there's still new players entering the market to gallium nitride, and those new entrants at this point in time are still in the qualification or in the device and the sampling phase of their technologies to their end customers. And you have seen the numbers that I was just commenting towards the question that was asking. We expect the Gantt segment for us to be slightly up next year. Again, it's an indication, qualitative indication, as we see that utilization is increasing. and we expect due to the increasing utilization some expanding orders from some customers kicking in. The broad market recovery, as I've indicated, yeah, with the real volume pool, we don't expect in 26. We rather expect that in 27, 28, yeah, but some increasing orders in 26. Does that answer the question?

Yes, that's very clear. Just a follow-up on this. I mean, why would you anticipate more of that volume in 27 and 28? Because we read that this new architecture from NVIDIA is supposed to be for Rubin Ultra, which is launched in H2-27. So, you know, I was expecting capacity maybe to come a bit earlier than this. So does this mean that maybe it will not be 100% done for some steps at the beginning, you know, the 50 and 12 volt steps, and it will go gradually? I mean, just, yeah, can you explain a bit why it should come more gradually, let's say?

So, this is based on our current view, what we have and the signals we get from our customers. I share the view that the new 800-volt architecture will lead to significant volumes around 2027, 2028. This is also our view. I share that. Now, for us, it's always very difficult to predict the exact timing when customers will place the orders from new equipment because we do see certain trends, but we cannot look into the exact budgets and plans of our customers. Therefore, at this point in time, we can only comment on what we are currently seeing. If later on in the year, volume kicks in and orders accelerate, we are very happy to it. We don't see signs to that yet.

Great. And maybe a last question on GAN. I mean, Joel is saying that the GAN market would be close to $500 million this year without data centers being really a contributor. What would you guess would be the size of the data center market for GAN compared to the overall size of the market this year, like $500 million?

So I do not have the exact timing for my message in mind. And we have looked at a midterm perspective, I think somewhere triangulating 28, 29, 30, something a little further out. And in this triangulation that we've done, the data center opportunity was an upside of about 50% on top of the market without the data center opportunity. You may recall that we have a slide out there in the investor deck which on the x-axis has three time horizons, yeah, I think 20 to 23, I think 24 to 26, and whatever, 28 to 30, something like this. And on the y-axis, the different voltage levels, low voltage, medium voltage, and then very high voltage. And there we have put the AI data center opportunity, and this is the market that I'm referring to.

Okay, that's clear. And maybe last question for me on the gross margin. I mean, the current guidance implies record gross margin in Q4. Yeah, just can you help us maybe, you know, see the main drivers of this?

Yeah. I take that one. I mean, like in the last years, the Q4 will be the strongest quarter just by volume. beyond that we expect an improved product mix, yeah, especially a higher share of final acceptance revenues coming with high margins and also some fixed cost regression effects. A little bit of color on the product mix. We expect a big share of G10 family products, yeah, around 50% of Q4 revenue so that you get an idea. So also looking at the, comparing this with the last year, margin, these margin ranges appear achievable for us, yeah.

Okay, great. Thank you very much.

And next up is Didier Semama from the Bank of America. Over to you.

Yes, thank you for taking my question. Good afternoon, gentlemen. I've got a couple of questions to be clarification on the comments you made earlier on 26. And perhaps my math is not right, so please don't shout at me if I'm wrong. I think you said the sick part of the business would be down 20 percentage point in terms of group sales. I mean, by my calculation, that would imply a pretty minor revenue contribution in 26. So is that correct? And then equally optos up, I think you said 10 percentage points within the group that's going to put it at something like 150 million next year. Is that the right ballpark?

I would say right ballpark, right indications, yes, as far as we can say. I mean, it's very early, but we really wanted to give you something.

Yeah, exactly, yes. No, that's incredibly helpful, to be perfectly honest. So, I guess the question, when I look at the comments you put on the nine-month report, you said about 50% of the bookings came from power electronics. So, I have to assume that the rest mostly come from optos because LEDs, et cetera, which, if you compare to what you said last year, means that the bookings in optos are probably up meaningfully, which is, again, consistent with what you said. So perhaps, you know, when you look at history, optos, like all the other segments, have tended to be incredibly cyclical. So would you think that there is duration in that growth in optoelectronics beyond 26? Or do you think that, you know, the big effect cycle we see currently for silicon photonics and lasers is going to be, as we've seen in the past, you know, big, big year, and then it falls off a cliff?

Oh, I think you asked the trillion, the multi-trillion dollar question, how long the AI bubble will last.

I do not have the crystal ball for you, right? If I would, I might not be sitting in this place right now.

Okay.

I think it fully relates, given the serious note, yeah, some joking aside. A big part of the laser part is, in fact, coming from the datacom, right? And the datacom, again, is driven by the AI and the AI data center built out. So, it really hinges on that one, yeah, to a very big part, yeah, probably 50, 60%. So, it really depends on how exactly that's progressing, yeah. But we can only see what we have now in our visibility. But a longer term, two, three years out, I think it's as difficult as for everybody predicting the AI trend.

No, for sure. And if I may, as a follow-up, I mean, you mentioned Nokia slash Infinera as a customer for your G10 platform for their peak products. Can you give us a few more examples of key customers for that division so that we understand the underlying dynamics, please?

Unfortunately, I cannot because we keep customer names always strictly, very strictly confidential as under NDA. Thanks for that. We are extremely sensitive to that. I can give you a qualitative indication. Imagine you think who may be the top 10 providers for data communications devices for AI. You can assume that at least 80%, 90%, maybe 100% of those guys are our customers currently placing order with us, and 90% of those are placing orders for the G10 ASP. Maybe I can give you that indication. And I really mean it as I say it.

Yeah, no, that's very clear. Thank you so much.

And now we're coming to the next question. It comes from Madeline Jenkins from UBS.

Hey, thanks for taking my question. I just had one on utilization rates. You mentioned that the GAN power. We're increasing. Could you quantify that at all? And also, I guess, get a sense of what your silicon carbide utilization rates are at Chinese and then Western customers. Thank you.

So I understand your question about detailed utilization rates. We don't have those. And we could also not share them if we would have them. But what we can say is that based on spare part orders, based on service orders, we see a trend here, which is a good utilization increase for the GAN power, which leads us to expect some volume expansion orders in 26 at a moderate level, as we have indicated. At the same time, in silicon carbide, for the overall market, I think towards the beginning of the year, We have seen very low utilizations with very low, I mean, clearly far below 50% means far more than 50% of the capacity installed in the market was standing idle early in the market. And maybe we are now approaching a 50, 60, 70% utilization in silicon carbide. So, we do see an increasing, but we are still far from a level on the market level where customers are really going into reorders and expansion orders. I think that's not yet on the agenda.

Okay, that's helpful. And then I guess all your kind of new orders in silicon carbide specifically, are those kind of new customers in China? Is that the right way to look at it?

Yes, we did have significant orders and shipments in 25 in silicon carbide into China, quite a diverse set of customers, highlighting the success of our G10 silicon carbide platform. So I think we've managed to establish that platform very well in the China market. That was all relating to the earlier question by John Arden. That was all for 8-inch or having 8-inch in mind. However, we are all aware of the large overcapacity in silicon carbide in China. Also, the China silicon carbide business at this point in time has slowed down. I think the market overall is digesting the existing overcapacity. However, I think we all see the very nice success of Chinese electric vehicles at some point the overcapacity will be digested and that there will also be new orders.

That's very helpful. Thank you. And then just a quick final question. Do you have a sense of kind of how much of your current gallium nitride revenues this year, let's say, are for data center applications?

That's honestly very difficult to predict. Sorry for having only a vague answer because our gallium nitride customers, I think we all have a couple of very big names. leading power electronics makers in mind, right, they use our platform essential, our tools essentially for all the applications across the board. On our tool, in the same configuration, you can produce a 20-volt, a 100-volt, a 650-volt, and even if you want a 1,200-volt device without any change in configuration. And therefore, we as a maker just send the tool as it is. And the customer can do whatever the customer wants with it without a modification in those power ranges. Therefore, it's very difficult to predict. If there would be a different configuration by voltage range, then at least we would have an indication. But therefore, it's difficult for us to say. Sorry for that one. Silicon carbide is different, right? Six to eight inch, right? In other words, the customer needs a configuration, and we see spare parts orders or parts orders, and we can at least give you here in the call a qualitative indication. For the GAN, it's really one size fits all, and, yeah, customer takes it, and then we don't know.

Okay, makes sense. Thank you very much.

Sure. Next up is Ruben Divos from Capital February.

Yes, good afternoon. I just had a follow-up on Silicon Carbide. I think you touched upon it already, but it was around your comments on benefiting over proportionally. when the cycle would return. I think you talked about a more diverse set of customers, so that might be an explanation, right? But just curious around what degree of confidence you have, right, to make that statement of outgrowing the market. And even outside, like automotive, how does the pipeline shape up, you know, thinking about industrial as well in silicon carbide? Thank you.

Thanks a lot. I think your question hints very well towards the future direction of silicon. Let me go a little deeper to expand on it. Maybe some of the technical backgrounds are interesting. So, the first generation of silicon carbide devices, which we have seen, I would say, in the last five years, with a very simple MOSFET consisting essentially of just one thick layer, one thick epilayer. Now, what I mentioned, the next generation of devices, which to the expectation of all market participants will be the main volume in the next wave. Everybody expects the next wave of growth, 27, 28, timing to be TDD, to be super junction MOSFETs. So, this is the device where this one thick layer is split into three or four thinner layers. So, each of them about one-fifth or one-fourth quarter thick of the initial one, yeah. And it's not just one big epi, but the wafer would be put into a tool four times, yeah? So you make one thin layer, then you do some device processing, and then the wafer returns to the silicon carbide epi tool, comes the next thin layer, and so on, and multiple times, yeah? And this super junction technology shifts the operating point from one thick layer, which, let's say, has in the past been deposited say, in about one hour to two hour processing time, now into multiple thinner layers, depending on which type of equipment, let's say, it now takes 15, 20, 30 minutes, instead of one or two hours, yeah? So, the wafer gets into the equipment multiple times. And with that, the complete dynamics about the productivity of the tool, the key KPIs, and so on, is shifting, because essentially, it's a very different operating point, yeah? You can buy... In analogy, you can buy a car which is perfect as a city car, yeah, small and nice and fits into parking lots but doesn't drive very fast. You don't care. And a perfect travel car for long-distance travel or a nice sports car for going up the mountain pathways or driving races, right? And each of the operating points has a different optimal. And this new operating point about thin layers, so our calculations and also to the feedback we receive from customers, is very beneficial for the batch tool which we are offering. This is the reason why we've made these positive earlier statements. And with that, let me come to the second part of your question. The other part of the market which may provide further growth, I think it's still a little further out than 27, 28, is the market for industrial applications. That market could probably towards the end of the decade grow very big. What we are talking here is about the following. Today, we use the silicon carbide devices mainly in switch mode power supplies or like in power devices for the car, yeah, the main inverter, and in voltages 650 to 1,200 volts. We can also make silicon carbide devices which have 3,000 volts or 6,000 volts or 10,000 volts, yeah, much, much higher voltage classes. And the industry is working on, that was, for example, one of the elements in the NVIDIA power architecture. I think everybody here in this call has the chart of the architecture. If you look at the chart of NVIDIA, on the very front end, you come from the grid, and you enter the grid into the data center at voltages around 14 kilovolts. And that's 14,000 volts. And the sound conversion from over 10,000 volts Eventually, down to 1,000, yeah, this is done by silicon carbide, and then from 1,000 to 1 is done by gallium nitride, yeah. Now, you cannot only use the silicon carbide in a data center for these high voltages, but in the entire grid. And we all know as more and more renewables are being used worldwide. I think China needs to pack, yeah, with driving down the cost of solar and wind, but the whole world is following. And we need much more active grid stabilization, load management, active management, and so on and so forth. So the grid, the worldwide power grid will experience over the next two decades massive investments into switching infrastructure. Today, this is all being done by transformers. Everybody knows next to the highway like these transformer stations standing. In the future, many of those will be done by active switching And this will all be done by silicon carbide power devices. So all the leading, yeah, grid suppliers, whether this is a Siemens, an ABB, Schneider Electric, General Electric in the U.S., are working on such devices. And it's a nice end segment for silicon carbide to come. However, I think this is a longer-term trend. I would not put the years 27, 28 on it. I would rather put 29 onwards as a nice trend for the turning of the decade.

All right, great. Thanks for the context. Very helpful. Just my second question related to optoelectronics, basically. I think you've called co-packaged optics as a key driver for indium phosphide adoption. Yeah, how quickly would you expect the market to move there from pilot into volume co-packaged optic deployment? And you've very helpfully framed the tool market size for silicon carbide and helium nitride in your slide deck. So may I opportunistically ask whether you've done a similar exercise for the G10 arsenide phosphide platform? Thank you.

Thanks a lot. I take the suggestion it's a good one. Let's take that on our action item list. I see smiles around here in the room. Yeah, it's a good one. We don't have it yet for today, so I cannot give it to you maybe in the next earnings call. Now to your question about the sizing and what we see. For the optoelectronics market, unfortunately, it is much more difficult to predict the event for the GAN and for the silicon carbide market. Let me try to illustrate to you why. In GAN and SICK, we talk, at least for the main volume segment, for pretty standardized segments and types of devices, right? For GAN, we talk 20-volt, 100-volt, 650, and then exotic 1,200 silicon carbide. 650, 1200, and now I was talking a bit about the very high voltages. So, you can put it into two or three classes. Unfortunately, the optoelectronic market is extremely fragmented. We both see that in the number of players. I don't know. There may be a couple of hundred optoelectronics producers at companies, while in power electronics, we talk probably about, like, maybe a dozen or two dozen, three dozens maybe at most, yeah? That's extremely fragmented. And such are the different technologies, which is competing with each other. The good thing is, this is physics. They all have in common, as of today, they need a white band gap semiconductor, yeah, gallium arsenide, radium phosphide, for generating the light. But then the way the light is being processed, whether this is on an indium phosphide or gallium arsenide-based photonic integrated circuit, or whether the light coming on is put into a silicon photonics. You can use silicon, silicon, silicon dioxide waveguides and switching devices. This is extremely diverse and therefore very difficult to predict. I wouldn't dare at this point to make a prediction where it goes. We are aware that all the guys who are working on the leading edge CMOS nodes, yeah, and also doing heterogeneous integration, all of them work on multiple technologies, because even for the big guys in the industry, things like TSMC, it's difficult to really say, well, this technology is winning out against the others.

Okay. Great. Thanks a lot.

Next up is Andrew Gardiner from Citi.

Good afternoon. Thank you for taking the question. I just had one on the margin outlook into next year that you provided us, Felix, saying that you thought EBIT margin next year would be in line, perhaps better year on year. Can you just sort of give us some of the drivers there in terms of, you know, gross margin? I mean, obviously, you've given us the mix in terms of opto and GAN up and sick down. You know, how would you sort of quantify that in terms of magnitude of gross margin change next year? And also, you've done a sort of workforce reduction earlier this year. Given the still slow market in SIC, do you see any need to continue to reduce OPEX or are we far enough through this down cycle now where you just sort of have to, you weather it because you can see the long-term opportunities already that there's not much change, incremental change in terms of OPEX into next year? Thank you.

Yeah. Thanks a lot for the question. I think part of the answer you've given, let me try to give an end-to-end consistent picture. So, we are referring to EBIT margin, so really to bottom line, yeah. I have not given indications on the gross margin, no quantitative, right? So, I was really mean EBIT margin, yeah. And I think there's three drivers behind our indication towards, so we wanted to give you a very clear indication that the margins is not getting worse, yeah, despite the top line suffering probably a bit. And I think there's three drivers behind it. On the one hand, we see margin-wise a bit stronger product mix, indicated the gain of opto. That helps a lot. And secondly, we will see the full year effect of the headcount reduction, which we conducted early in 25. In 25, there's also cost and restructuring cost. In 26, we get the benefits of that. And the third topic is We use the slow period of the cycle right now for some operational improvements, be it working our storage topics, be it working on logistics topics, be it currently working on our operational efficiency. So, we have quite a bunch of these things ongoing, which are just making our operations more fluent, which reduce the external spend that's going out the door all the time. And we expect some of those effects to kick in. And based on those three effects all together, we expect, yeah, in terms of absolute terms and stable bottom line or percentage-wise stable or even improved bottom line, yeah, despite the probably slightly weaker top line. But I think that's important in the end for you guys also then to everybody here on this call to give an indication where does it lead on the profitability.

Thanks very much.

And the next question comes from Aditya Metuku from HSBC.

Thank you for taking my questions. Firstly, I just wondered if you could give us some clarity on what drove the push out this year, which end market drove the reduction in outlook for the year.

Sorry, I didn't, acoustically, the line was very bad. I didn't get the question. Could you repeat it, please?

Sorry, apologies. I was just wondering if you could give us any color on what drove the reduction in guide in 2025. Where did you see this push out, which end market?

Okay, sorry, now I get it. Thanks a lot. Honestly, this was all across the board, except for the laser market. I think the laser market we've indicated is strong and continues to be strong, and this is growing into next year, as we have just discussed. We have seen a weaker than expected yarn and silicon carbide. Initially, as we started into the year, it's always very difficult, right, to predict the full range, and we have put the full guidance range accounting Early in February 25, so looking now seven months back, in our full guidance range, we have accounted for both a slow market scenario, which now is unfolding. So, therefore, we now look at the lower half of the guidance. And early in 25, with the upper end of the guidance, we have also taken into account a more positive market environment. As we all see, the more positive market environment for power semis, for electric vehicles, is not yet unfolding. So the upper half, therefore, had to be corrected now to down to the lower half. We are narrowing down to the lower half of the guidance.

I understood. Got it. And then just on the LED and the micro LED market, you talked about seeing signals of improvement. I just wondered if you could give us a bit more color on what exactly you're seeing, especially on the LED side. Is it driven by China? Is it anything construction related? Just any color you can give us on these two end markets in terms of the signals of improvement.

Yeah, thanks a lot. So on the LED market, this is typically almost exclusively China-only market, I think we can say, yeah, because of cost and volume effects. We all know, right, China is very, very strong these days on the display making. It used to be, as you have indicated in your question, historically, there used to be a lot of the LEDs going into construction, right? In China, they put these big, big walls on the skyscrapers. But as we all know, the China housing bubble has collapsed, right? That was also the reason why the segment was bad for us for two years. Now we are seeing the classical LED market coming back with, we call it fine pitch displays, and especially display backlighting. Local dimming, local backlighting of display, you can achieve magnificent effects, yeah, by either having white LEDs behind your LED display. You can create a beautiful black, or you can produce quite some nice bright colors on it, yeah, with that one. And that's even going now into turning into RGB. The good news is it is ready already today. The bad news is it makes it much more difficult for micro-LED to gain ground in the televisions, yeah, because the normal displays are already getting much improved quality. So, let's see what it means for the micro-LEDs, yeah. The other point which I was indicating, we still see that on micro-LED, research work is ongoing. We've seen some first devices. I was relating in my prepared notes to the Garmin watch, yeah, which is the first micro-LED watch. They're coming out at quite high prices and, unfortunately, with slow battery lifetime. So we are seeing that coming. And we see a lot of companies currently doing work on AR glasses and VR glasses. You may have seen the glasses launched by Meta. There's much more stuff in the preparation. I think this is a new device category which will really come into the market quite soon. And, yeah, we see some moderate demand for that also next year, as I've indicated in my prepared notes. But again, it's far away, to be clear, it's far away from the micro-LED message investment wave that all of us two, three years were expecting, where we would expect that micro-LEDs are penetrating everything from smart watches to notebook displays and televisions, right? That one we are not seeing yet. We still see the research ongoing. So many companies are still working on it. but we don't have a clear in our view when exactly that's coming.

Got it. And just one last question. With TSMC getting out of the GAN market, I just wondered, you know, do you see a market for secondhand tools, for your GAN epitaxy tools, and would that affect demand maybe next year or the year after? How do you see the implications of TSMC getting out of the GAN market?

I see it as a bit of a reshuffle, which happens normally in all the markets where there's a bit of a slowdown in the market. I think we see the same in silicon carbide. Some players are exiting, some others use the opportunity to buy some used tools to get a hold of or to get used tools and then newly to enter the market. I think it's a normal play that happens in a softer market environment. For the overall market and for us, this has essentially no implication because whether a used tool is installed or whether a tool is installed at company A or changes the ownership and is later on installed within the factory of company B, it doesn't change the overall installed capacity in the market or doesn't change the market dynamics, yeah? So, for us as an equipment maker, we are, We support customers when they need help in either way, sometimes for moving tools, for reinstalling tools, but it doesn't change or doesn't impact the market.

Understood. Thank you.

And the next question comes from Michael Kuhn from Deutsche Bank.

Good afternoon. Thanks for taking my questions. I'll start with, let's say, the usual update on 300 millimeter GAN. I think it's quite well known that Infineon is quite advanced in that context, and obviously, no big surprise there, cooperating closely with you in that regard. So, when should we expect tool orders to arrive at, let's say, outside Infineon? What's your view on how many companies are currently working on the transition and preparing orders?

So I think with 300-millimeter GAN, the market unfolds pretty much as we have expected, yeah. If you recall, we stated earlier that we see the 300-millimeter GAN as a subsegment of the overall GAN market. Initially targeting the lower voltage classes means 100 volt, 20 volt, maybe 200 volt, yeah. Maybe at a later time also 650, but really starting at the lower voltage classes. And we get confirmation from many customers what we had expected early on, that customers are really targeting to switch and to reuse existing silicon MOSFETs or silicon IGBT capacities and to rededicate existing FAPs for gallium nitride. Of course, customers need to buy a new epitool because the silicon epitool is a completely different tool from a gallium nitride epitool. So, in any case, there's a new tool demand for gallium nitride tools. However, the market adoption and the customer decision for the largest part depends on the installed base of factories. So customers who have today their silicon MOSFETs running in a 200-millimeter silicon FAB are likely to switch to a 200-millimeter GAN tool. Customers who today are running their silicon MOSFETs in a 300-millimeter FAB will want to switch and rededicate their 300-millimeter FAB to a 300-millimeter GAN FAB. So that is the market dynamics. And I think based on that dynamic, you know, we never comment on customers unless we have a joint press release with customers. So allow me to describe the trend without names, as we always try to do. So we really see customers who have installed 300-millimeter silicon capacity are switching now and starting to switch and have plans. The many, many, many other customers who have 200-millimeter silicon sats continue to work on gallium nitride 200 millimeters. And as a result of that, our strategy going forward is that we will support both groups of customers. So GAN 300 is not displacing GAN 200. We have our GAN 300 millimeter roadmap. We're very happy with the results that the 300 millimeter pool is giving. But at the same time, we also maintain an active 200 millimeter GAN roadmap where we also work on improvements. We have multiple very close customer collaborations on 200 millimeter tool improvements or even next generation tools for 200 millimeters.

Understood. Thank you. Then on cash flow and working capital, given that you don't expect top line growth next year, how much more would you think you can further optimize working capital? Because I think you mentioned you see further potential also into 2026.

You know, let's focus maybe on the inventories, yeah, because the rest of the working capital is always a little bit arbitrary, you know, the receivables and the down payments, yeah, but on the inventories, our key ambition is to drive them down further. It's a little bit difficult, yeah, to predict, yeah, not knowing the exact product mix and so on, but like at first, like high-level expectation would be another 20% down. I would be more ambitious Let's check. So I would say by the end of this year, I would expect inventory 275 plus minus 15, yeah, to give you a number. Let's see how close we come. Maybe next year 200 million. Let's see. Something like this. Okay.

Looking forward to it. Maybe you can do a little bet between the two of you who comes closer. Thank you.

Thank you. There are no further questions.

Good. Perfect. And I think we had a lively discussion. We very much appreciate, as you see. And, yeah, stay tuned. I think there's a good exchange, and I think we all see each other latest in the February call for the full year results.

Exactly. We'll be on the road at various conferences, so I guess a lot of you, at the one of the conferences and for those we don't catch before end of the year, already a Merry Christmas.