Q1 2008 Aixtron AG Earnings Conference Call - Final

Corporate Participants

* Guido Pickert Aixtron AG - IR * Paul Hyland Aixtron AG - President & CEO * Wolfgang Breme Aixtron AG - EVP & CFO

Conference Call Participants

* Bill Ong American Technology Research, Inc. - Analyst * Sandeep Deshpande JPMorgan Chase & Company - Analyst * Mike Burton ThinkEquity Partners - Analyst * Guenther Hollfelder Unicredit - Analyst * Johannes Ries Cominvest - Analyst * Uwe Schupp Deutsche Bank - Analyst * Steve Babureck Exane BNP Paribas - Analyst * Pierre Maccagno Needham & Company - Analyst

Presentation

OPERATOR: Good afternoon, ladies and gentlemen, and welcome to the Aixtron conference call regarding the First Quarter 2008 Results. Today's call is being recorded and I would now like to hand you over to Mr. Guido Pickert, Head of Investor Relations of Aixtron for opening remarks and introductions.

GUIDO PICKERT, IR, AIXTRON AG: Thank you very much. Good morning or good afternoon everyone. Thank you for attending today's call. With us today are Paul Hyland, President and Chief Executive Officer of Aixtron and Wolfgang Breme, Executive Vice President and Chief Financial Officer of Aixtron.

As the operator indicated, this call is being recorded by Aixtron and is considered copyright material. As such, it cannot be recorded or rebroadcast without express permission. Your participation in this call implies your consent to this taping.

As in previous results conference calls, I trust that all participants have our results presentation slides, page two of which contains the usual Safe Harbor Statement. I will, therefore, not read it out but would like to point out that it applies throughout the conference call.

This call is not being immediately presented via webcast or any other medium. However, the Company reserves the right to place an audio file of the recording and a written transcript on its website at some point after the call.

Let me now hand you over to Paul Hyland, Aixtron's President and CEO to start the actual presentation. Paul?

PAUL HYLAND, PRESIDENT & CEO, AIXTRON AG: Thank you, Guido. Good afternoon and good morning, ladies and gentlemen, wherever you are calling in from. And many thanks for joining us, once again, to listen to the presentation of our financial results for the first quarter of 2008.

Before I go into the details of the results, let me tell you up front that they are exactly in line with our expectations and that our full year guidance, which I will come back to after Wolfgang has taken a closer look at the Q1 numbers with you, is therefore unchanged.

Let's move to slide three now and an overview of our operational highlights in the first quarter of this year. We delivered total revenues in Q1 2008 of EUR 62.6m, a marginal decrease year-on-year but still a very strong quarterly performance, the highest revenue figure for 12 months and it's 16% up on the prior fourth quarter 2007 revenue figure.

Reflecting an increasing percentage of common platform system revenue and a favorable product mix, our gross margin improved by 1% to 39% despite the further significant weakening of the U.S. Dollar during the reporting period.

We achieved an EBIT figure of EUR 8.7m, a little higher than the EUR 8.2m in Q1 2007, a 1% improvement on return of sales year-on-year, more than double the EUR 4.3m we reported in Q4 2007.

Importantly and very encouragingly, our equipment order intake have more than doubled in comparison to last year's Q1 figure and came in at EUR 85.5m and is only marginally down on the prior quarter.

As a result of this very strong order intake, our order backlog have also more than doubled year-on-year to EUR 157.3m by the end of March 2008 and is more than 19% higher than December 31, 2007.

Finally, our cash position situation has once again improved markedly. Cash and cash equivalents are up to almost EUR 70m despite the high levels of work in progress currently going through the factory.

Let me now update you on the following slide four, on our observations regarding the state of the markets we're active in.

Let's first of all look at the left column which is headed - Compound Semiconductors. Despite the further weakening of the U.S. Dollar and fears of an extended recession in the U.S.A., we continue to benefit from strong compound semiconductor industry demand.

Continued market confidence drove demand for equipment for predominantly the production of LEDs for end market applications such as LED backlighting products for liquid crystal display and commercial display products.

For us, this demand mainly took the form of multiple and scheduled orders for our latest integrated concept, common platform, high capacity systems. Consequently, compound equipment revenues were up 10% year-on-year and reached EUR 47.8m or 76% of our total revenues.

Compound equipment order intake was up 161% and reached EUR 77.3m or 90% of total equipment order intake for the quarter.

Let's now move to the right column headed - Silicon Semiconductors. Revenues for our silicon deposition equipment decreased 40% year-on-year to EUR 8.3m or 13% of total revenue as expected and discussed most recently at the full year results presentation just over a month ago.

Silicon order intake was also down 25% year-on-year to EUR 8.2m or 10% of total equipment order intake for the group. This was due mainly to lower capital spending for memory production lines in a highly competitive and volatile market.

There is nothing surprising in these numbers and they reflect not only what we've been predicting for several quarters but almost very much in line with what the whole memory equipment market is currently reporting. But we have already anticipated these volatile conditions into our year-end guidance.

That said, the very difficult current demand supply situation for memory products does not deter us from continuing to position Aixtron for what we believe to be a positive outlook for our technology. We firmly believe the gas phase deposition technologies will converge driven by the need and application of more complex material structures.

Aixtron has historically positioned itself as the technology and innovation leader in its chosen field and that is the role that we are striving for in its development of material convergence.

It will not surprise you to hear that this convergence process will not be an overnight development and will require perseverance on our part. And that includes being able to manage extended periods of stormy weather as we are experiencing in the silicon arena now.

Let me hand you over now to our CFO, Wolfgang Breme, for a more detailed look at the key numbers in the Q1 financial statements. Wolfgang?

WOLFGANG BREME, EVP & CFO, AIXTRON AG: Thank you, Paul, and good morning and good afternoon to all of you. Allow me to give you a quick overview of the numbers on slide number five.

First of all, Paul has already pointed out the very encouraging increases in total equipment order intake and backlog. While revenues have decreased marginally year-over-year, it's worth emphasizing that Q1 continues the incremental revenue trend over the last four quarters.

Also encouraging for us is that our gross margin is again inching closer to the 40% mark in spite of currency headwinds. This increase was driven by a further decrease in the cost of sales which in turn was largely due to sales of higher margin products and economies of scale.

Needless to say that this improvement would have been more pronounced had it not been partially offset by a negative currency effect. The average exchange rate for the U.S. Dollar was $1.50 in Quarter 1 compared to $1.37 average in fiscal year 2007. As you know, the decline of the dollar continued in Q2 which will put our margin even more under pressure. This said, our full year guidance given to you in March was far from being too conservative.

In this context, let me briefly expand once again on our currency exposure and on our hedging policy.

Given our revenue and cost structure, we are significantly exposed to currency risks and we try to manage this exposure by currency hedging instruments. We are, of course, aware of the fact that those derivatives have only a mitigating effect for a limited period of time. Therefore, we are targeting to source more and more in U.S. Dollars wherever this is possible from an IP protection standpoint and feasible and cost perspective.

Aixtron enters into a variety of derivative financial instruments to manage its exposure to foreign currency risks. Those include forward exchange contracts and options to hedge the exchange rate risks from the exporting of equipment.

I believe it's worth mentioning here that Aixtron operates in a marketplace in which dollar is the predominant trading currency. It is our policy to enter into exchange contracts to cover specific foreign currency receipts in the range of 80% to 90% of the known exposure. We also enter into contracts to manage risks associated with anticipated sales transactions generally in the range of [15] months and generally within 50% to 60% of the exposure generated.

In an industry where order forecasts beyond six months are highly speculative from a timing perspective, this limits of course a horizon for our hedging strategy, but, of course, also the risk of losing money with a thoughtful long-term hedging in a fast turning environment.

On the other hand, I would like to draw your attention to the fact that all risks of course offer opportunities. In this case, the consensus today clearly tells us that the dollar could be undervalued at today's rates. If this would be true, the exchange rate would move in that direction, Aixtron would be one of the first to benefit from this on a notable scale. As described in our 2007 Annual Report our sensitivity analysis shows that a 10% movement of the currency to our favor may improve our results, or any results, by EUR 5m net.

We will continue to pursue this hedging policy and hope to absolve some of the even more pronounced dollar weaknesses since the beginning of this year. This is clearly visible, already, in our Quarter 1 results.

However, the average exchange rate this year, to date, stands at around $1.55 so our task has become even more difficult.

Coming back to the table on slide five, our operating margin has improved by 1% and now stands at 14%. (inaudible) following consistently positive results as the Group companies in Europe utilized most of their tax losses carried forward.

As Paul pointed out, our cash situation has improved further and I'm glad to state once again that we continue to enjoy full financial flexibility to fund our operations as well as our investments in future growth.

Finally, our free cash flow of EUR 12.9m in Q1 reached a high level mainly fueled by cash flow from operations before change of balance sheet items.

Let's now look at slide six and our tried and trusted business development chart.

The most significant observation to make here is the almost 20% quarter-over-quarter jump in our order backlog. This order backlog stands now at EUR 157.3m as of March 31st, the majority of which will be recognized as revenue in 2008. So if you add the EUR 62.6m of our actual revenue for Q1 to the reach of the order backlog, we have nearly EUR 200m of projected revenue available to us or more than 65% of our revenue guidance for the whole year.

Paul will comment further on this in his conclusion. But before I pass back to him, again, let me take a brief look at slide seven and here, in particular, at the revenue mix by technologies.

Having already looked at the business development on slide four with Paul, it's probably not surprising that compound revenues have become an even more prominent component of our total revenue. Compound equipment revenues now contribute 76% of our total revenues from 68% in Q1 '07 and silicon has dropped to 13% from 22% in Q1 in 2007. I don't think that we have missed an opportunity in recent quarters to highlight that the environment for memory product is extremely tough and will continue to be so for some time to come.

We and all our competitors face over-capacity at our customer sites and fierce competition between them in this space and therefore capital expenditures are falling.

That said, as Paul already pointed out, we think that persevering with our strategy of market diversification, even in the face of a temporarily difficult environment, is the best long-term interest of our shareholders.

The other two revenue splits on this slide remain nearly unchanged which means that the LED applications are currently the main drivers for our business development. From a regional standpoint, Asia is our dominant marketplace.

Ladies and gentlemen, thank you very much for your attention. I will now hand you back to Paul but I will, of course, be available later to answer any questions you may have. Paul?

PAUL HYLAND: Thank you, Wolfgang. If we could now turn to slide eight, as I pointed out in the beginning of this presentation, the overall guidance for 2008 remains unchanged. But, of course, we're now one quarter closer to the end of the year so let me update you on the current state of affairs now that we have one quarter of revenues and order intake under our belt.

Starting at the top right of the chart, or the light blue piece of the pie, Q1 revenue was just under EUR 63m. Moving down to spares, or the gray piece of the pie, we further expect a further EUR 21m of revenue to come in from the sale of spare parts in the remaining three quarters of 2008.

Moving further down to the lower half of the chart, or the dark blue piece of the pie, this is simply that portion of our EUR 157m total order backlog which we expect to be converted into revenue this year, namely EUR 136m.

Let me digress here for just a minute to respond to a concern that one or two of you have voiced recently concerning this period of extended order intake growth we've enjoyed, the concern being that existing orders, which we include in this backlog, could be canceled or significantly delayed by customers. Let me first remind you of our very strict order intake recognition policy.

We do not, as a matter of policy, recognize any orders in our order intake or backlog unless our customers have already furnished us with a purchase order, a firm delivery date for the equipment and have paid the required deposit. Incidentally, this means the path of some of the multiples that we've been receiving do not show up in any of the numbers you can see simply because that portion of the order may not yet have been linked by the customer with a firm delivery date or they may not have paid the required deposit.

When those conditions have been met, only then, do we report the additional order intake. We have not seen any cancellations or deferrals of acknowledged orders and remain convinced that this prudent and transparent approach to order recognition is a key element in our ability to accurately forecast year-end revenues.

And finally, to return to the pie chart, the top left or red piece of the pie, in order to get to our guided revenue range of EUR 270m to EUR 300m, our sales team has to deliver additional orders of at least EUR 50m to EUR 80m which are shippable and recognizable as revenue before the end of this year. EUR 80m would result in year-end revenues of EUR 300m.

As we've reported before, we expected and have now seen some evidence of softening in inquiry levels which lead us to believe that we are probably at the apex of the current demand cycle. However, even though we're not even at the midway point in Q2, we continue to have a positive view for the order intake in this quarter.

We continue to be confident that we can deliver the additional orders required to meet our guidance and we, therefore, maintain our overall guidance for the year of EUR 270m to EUR 300m revenues and EBIT of 10% to 12% for the year.

Thank you all very much for your attention, ladies and gentlemen. We'll be happy now to take your questions. I'll pass you back to the operator.

Questions and Answers

OPERATOR: (OPERATOR INSTRUCTIONS) Bill Ong, American Technology Research, Inc.

BILL ONG, ANALYST, AMERICAN TECHNOLOGY RESEARCH, INC.: Congratulations on a nice booking quarter, again. I have a couple questions. One is you've been talking about the pause in orders since the beginning of this year so no surprises given the essentially three quarters of record level bookings. Can you give us, maybe, a [analysis] of what type of trough levels we can expect in 2008 just so we get a reference point of when things are going to pretty much flatten out and then start to recover, perhaps in 2009?

PAUL HYLAND: No. I can't give you a figure on that, Bill, because we also said many times before, in fact I've even seen some statements from customers today, saying they have difficulty seeing two months now. But we've always said that seeing beyond two quarters is very difficult.

We can say that the activity levels in this quarter are still healthy but I think the signals are clearly there that there will be a slow down in demand and I think we've been consistently saying that for quite some time.

But I certainly don't anticipate at this stage a complete melt down or slow down. The demand is still very healthy. If we look at the application, some of the statements being made particularly from Asia on their view of the potential growth particularly for things like backlighting, are still very bullish. Perhaps too bullish for my taste in some cases but nevertheless I don't expect it to be a particularly deep pause, nor do I think it will last exceptionally long. But I can't really give you anything specific at this stage.

BILL ONG: Understood. And since you just mentioned that the June quarter bookings are looking very encouraging from your point of view, do you think the book-to-bill ratio will be above 1 based on your internal revenue and bookings estimates?

PAUL HYLAND: No. I think it will probably be around that figure.

BILL ONG: So a 1.0 plus or minus some small variation?

PAUL HYLAND: Yes. It's not going to be very -- it's going to be around --booking period 1 to 1.

BILL ONG: 1 to 1. Okay. Do you think bookings could be up maybe about 10% this year in '08 just given that we got the Q1 bookings and, again, a sense of June. Do you think a double-digit type of year-over-year growth bookings for this year?

PAUL HYLAND: Well, to tell you that, Bill, would be to tell you what orders I think are going to come in end of the year and I think I've already said it's very difficult to say what that will be more than two quarters out.

And it also depends on how long the pause is. I personally get the feeling with all the announcements coming out whether it be for increased market share of LED laptops or lighting, it may not be too long but we really can't see. And that's the honest answer because principally our customers can't be any more precise than that.

BILL ONG: I was just trying to come at it from a different direction. So my last question is actually, in your bookings, did you book any organic LED orders? Because I understand that they do have higher ASPs and a little bit longer lead times.

PAUL HYLAND: No. I don't think we did -- or I don't think we did in Q1. But by -- you're absolutely right. The ASP for those systems we have sold are higher but they are much -- there's not many of those systems going through. We're making very good progress.

We will, actually, be delivering in the next sort of two or three months the system to the trust of the [EPaper] for Plastic logic, and that starts then a fairly sort of extended development program in commissioning with them but nothing in Q1.

BILL ONG: That's great. Nice job, gentlemen.

OPERATOR: Sandeep Deshpande, JPMorgan Chase & Company.

SANDEEP DESHPANDE, ANALYST, JPMORGAN CHASE & COMPANY: Paul, just a couple of questions. Firstly, there has been news in the market about a couple of large companies possibly getting into the LED market. Have you seen any orders from any of these, TSMC or AUO, any of these companies, placing orders? Or do you expect that these orders are going to come in the next couple of quarters? That's the first question.

And the second one is, overall, in terms of your customers -- from what we're hearing from customers in Taiwan is that they are feeling some kind of inventory correction. There has been some slow down in the LED market. Is this the reason why you think that the orders are looking -- the comment you have made in your release today that you think at the current point you might have peaked in terms of orders? So is that the reason or is there some other feelers you're getting from your customer base? Thank you.

PAUL HYLAND: Well, I think the first part of your question, I think you're referring to what I think we might call downstream customers who are moving upstream into LED manufacturing. And I think the names you've mentioned, and several more, have been talked about fairly frequently and they are, I think that you've mentioned, people like AUO, Chimay, many of the backlighting suppliers have, themselves, expressed interest in moving into this area. We can't name all customers and we can't be specific about those but, yes, we have been talking to several of that type of customer over the last three to six months. But beyond that I can't go any further.

But there is certainly, as you would understand, more interest in that type of potential customer who see the opportunity to basically integrate into the manufacturing.

And so your second question was the inventory levels. There have been several statements made by different people but maybe I can just pick out one of them, maybe one or two. I know I was asked recently about Epistar, for example. And I know they made some statements towards the end of March saying, I think they said that they'd seen - I don't know what their exact expression was - but they'd seen lower demand than they expected.

But I think they were specifically talking, if I remember rightly from the press release, small to medium size backlighting [power] applications in the sort of 1,300 to 1,600 millicandela range. And they are typically not in things like laptops. That probably referred, I suspect, to more of the handsets business and, indeed, there has been a slow down in handset launches. But that may well change, I hope, in the next few months. And some of the comments from Taiwan in the last week are beginning to talk a lot more positively about the second half.

But, also, I think within a day of that announcement, Epistar, who is a very good customer of ours, also made the announcement about targeting -- I think they currently have something like a 1,700 millicandela package and their intention to raise that to 2,000 by the first half of 2008.

And that, I think, is in direct response to the arrival in the market of people like Toyota [GoZi] and [Achia], both of whom are now beginning to sell production qualified 2,000 devices themselves.

So I suspect it may well be that the bar has been raised as the number of laptop LEDs for laptops grows. I think we're still under 5% now. Then the spec to those devices is rising and that may be one factor. I think in another one I seem to recall, there were several announcements made by two other suppliers. I'm trying to remember who they were.

Both Unity and Harbor Tech both talked about having relatively low first quarters but being much more positive about the second half. So I think it's all symptomatic of the industry just adjusting to the market requirements and being able to get their products into a point where they can compete.

And the danger, if I might just add and sorry to interrupt you, a lot of these comments are coming from websites in Taiwan which tend to be news of the day and the longer term view I think if you step back from it, the industry continues to look very healthy. But, of course, you aren't getting this announcements on a daily basis which is tending to sort of send out, I think, distracting signals.

There is nothing unusual at all in the fact that we see a slow down. A huge number of systems have gone out there. But as we've seen before, one place starts to convert those systems into capacity, it's not very long, certainly historically, before we get the next investment cycle which is what we're expecting.

SANDEEP DESHPANDE: So this statement you made in you're your press release today is not related to essentially what you've been seeing in the market but essentially just order digestion?

PAUL HYLAND: Yes. What we've tried to do, and I made the exact same comment at Q4, was to say that quotation levels were dropping slightly. That was the comment I made at the end of Q4 and I just reiterated that. We continue to see just a softening of new inquiries coming in from the market and that's really what we've been predicting for two or three quarters. Nothing has changed whatsoever.

SANDEEP DESHPANDE: Thanks a lot.

OPERATOR: Mike Burton, ThinkEquity.

MIKE BURTON, ANALYST, THINKEQUITY PARTNERS: Congratulations on the strong bookings. First question, could you talk a little bit about Aixtron's position relative to the entire MOCVD market? There's been some that have questioned your market share. Could you perhaps address that?

PAUL HYLAND: Yes. This is the perennial question. I think the best thing to do is to turn to third party. We've, in the past, used rather than offer our own opinion is draw on the data that comes from market research. And the one we've used historically has been [VLSI]. I think if you look at VSLIs numbers for 2007 it makes it very clear that in terms of revenues, and that is what market share is about, we've increased the market share, again, over and above 2006. So there isn't -- and that shouldn't be terribly surprising.

One is because we were probably at least 12 to 18 months ahead of our major competitor who have launched their own high capacity systems midway through last year and are now in the process of qualifying that in many different customers who are, of course, looking for strategic second sources. So I really don't think you'll see any change at all.

We probably have gained -- well, we have gained market share in 2007 but it's a reflection, simply, of that timing. We continue to be the major player in that market.

MIKE BURTON: Do you anticipate market share gains from what you're seeing where the demand is coming from based upon the different geographies in your position relative to those geographies?

PAUL HYLAND: I think, Mike, we probably are already dealing with probably 90% of the world's customers. But many of those customers will choose strategically to buy from us and from our competitors just simply from a risk issue on sourcing. And there is no difference. It's the same profile we've seen.

We're very strong in Asia and always have been. And that is, indeed, where much of the growth is coming from today. Our markets -- the percentage of our revenues from Asia for the first quarter is, I think, just over 83%. So that's our principal market.

MIKE BURTON: And within Asia, as you're looking at the demand coming from China versus Taiwan versus Korea, do you anticipate -- how do you anticipate the changes there given your current orders? Is there --?

PAUL HYLAND: Well, as an absolute market, Korea still remains our largest market because we have -- it's probably one of our best silicon markets for memory products as well as compound market. In terms of just purely compound, Taiwan still remains the largest market by far. We do continue to have good business from Japan but China is one of those markets that is definitely growing. There's increased activity there. In fact, I was there only about a month ago and some of the progress we made there is quite incredible.

But I would expect, perhaps over the next three to five years, to continue to see growth in all those markets but maybe disproportionate in China because it's coming from a lower threshold.

MIKE BURTON: And as China becomes a bigger percentage, perhaps, does that do anything to your product mix as your -- is there a different demand for your newer generation equipment versus some of the older generation equipment?

PAUL HYLAND: No. They are very rapidly moving straight -- although there's been a long history of good R&D in China, they are rapidly looking for the best products and not just necessarily the older products.

So, no, I don't think that'll make any difference at all. If you walk forward over the next couple of years, I'm sure you will see almost exactly the same product mix.

MIKE BURTON: Great. Thanks.

OPERATOR: (OPERATOR INSTRUCTIONS) Guenther Hollfelder, Unicredit.

GUENTHER HOLLFELDER, ANALYST, UNICREDIT: I would start with the other operating income, the EUR 4.1m which you posted in Q1. Is there a very large amount, already, of R&D income? I think you mentioned it in the press release but what was the split approximately between R&D income and hedging here?

WOLFGANG BREME: The split is roughly in the range of EUR 2.5m is hedging and the R&D is in the range of EUR 700m and the rest is the rest.

GUENTHER HOLLFELDER: So you should keep the 0.7 so it's pretty constant over the coming quarters?

PAUL HYLAND: Yes. That's this year's assumption but as you know we are very active to identify research programs which fit into our corporate strategy and, of course, this can mean that because there are a lot of things going on in different areas of our interests and in the semiconductor world, it could be better but that's at least what we had last year. Last year we had a little bit less -- I think it was EUR 2.5, we had -- EUR 4m in '06 so that's the rates where we are playing. It could be higher. Could be, but as a conservative view it's at EUR 2.5m to EUR 3m this year.

GUENTHER HOLLFELDER: And based on the current used dollar trend and your hedging policy, what would be the hedging income in the second quarter?

WOLFGANG BREME: If you tell me the extension I can call you later and give you the number. The question is, really, what the exchange rate is doing. And I really can't give you a number at the moment. But, of course, the difference if you take the exchange rates, it was the $1.47 in Q4 and then it moved -- $1.44 in Q4, moved to $1.47, $1.49 average in Q1. The difference is not that big. We have to see what the dollar is doing right now. That's a little bit hard to estimate.

Of course, a lot of the hedging income was recognized in the first quarter already. So there is not an ongoing effective at the same magnitude. And I also have to point out what I did several times that we do not hedge revenues, we hedge cash inflows in U.S. Dollars.

If you see our cash position and our free cash flows, you can see that a lot of the revenues are already in-house as cash. So we cannot always buffer a revenue reduction by exchange rate effects with the hedging income because our policy is to get as much money up front when we get an order as we can. So it's not a 1 to 1 comparison that we compensate revenue shortfalls for hedging with hedging income and other income. It's not always possible.

But in total of course for the year we expect, if we take our guidance into account, we except of course solid hedging income for this year.

GUENTHER HOLLFELDER: And for the gross R&D expenses, are you still targeting a rate of around EUR 30m?

WOLFGANG BREME: Yes.

GUENTHER HOLLFELDER: And do you think the sequential increase in sales that (inaudible) is expected for the second quarter could offset the negative currency trend in the gross margin?

WOLFGANG BREME: Maybe not. If you take our full year guidance, you can see that we definitely are not going for 14% EBIT. There's two factors, one is currency. The other factor is we will have significant shipments in the next quarters and if you consider the details of our revenue recognition policy we may have fluctuations between the quarters because in one quarter we recognized revenues on shipment which is typically 90%, maybe in the next quarter we recognize the acceptance revenue, the 10% outstanding piece of the revenue recognition. And, typically, the 10% installation of final acceptance revenue has a much higher or very, very high gross margin so we will also, for this, we will see fluctuations between the quarter. Honestly, I do not expect comparable margin in the next quarter. But it is not concerning at all. It simply will fluctuate.

We feel very comfortable with our full year guidance which was 10% to 12% EBIT but this takes, of course, into account a weakening of the U.S. Dollar. And as we don't give quarterly guidance there may be fluctuations between the quarter. But it's not concerning at all from a full year and for a corporate perspective from our side.

GUENTHER HOLLFELDER: Maybe a last question, I think, for Paul. Regarding the technology trends in the TV markets, I think we still haven't seen a lot of momentum here. Regarding what's currently going on, do you see any new trends like a decreasing number of LEDs either in TV's for backlighting which could be able to drive here the LED market or what do you see right now in the TV area for LED?

PAUL HYLAND: I think there's definitely a lot of activity in that area. A number of people are looking at different approaches and a key to that is, as you say, reducing the number of LEDs because it's all about cost of ownership.

It is true that, however, there are some increasing number of televisions out there. Samsung has launched three different sizes of LED TVs, I know, in the U.S. - a 20 inch, a 40 inch and even a 56 inch. But the price of them, I think they vary from about $1,200 to something like $2,600. So it's very early days.

I still think the key, very much like laptops, is when the volume and the performance gets over that key tripping point, then you get a significant adoption. Most of what we're seeing now I would still put into the category as high performance positioning products, premium positioning products. They are not yet in the high volume but clearly what they are doing now is part of the process. You don't get to reduce the cost of ownership without getting the manufacturing process going and driving the costs -- that's just what's happening in laptops.

I think we're still below 5% in terms of laptops and depending on who you talk to, there's either going to be a 20% increase next year or 20% increase over the next four years. No one is absolutely certain but it's without question they are stepping closer and closer to whatever that magic tripping point is.

But LED TVs are definitely coming. You can see them.

GUENTHER HOLLFELDER: And what about given this new hype for notebooks what we are seeing with (inaudible) and also a new Hewlett Packard coming into the market, do you think this could be a segment with really high volumes that could drive LED backlighting and LED demands as a new (inaudible) application?

PAUL HYLAND: I think unquestionably, any mobile application which is geared towards -- or is dependent on good quality or kind of differentiated on a good quality display with low power consumption and no mercury, clearly, is going to take the opportunity with an LED application. And, in fact, those smaller notebook sizes are probably much more reachable low fruit than the bigger, more challenging ones.

I think as I understand it, I'm sure laptops will grow, but it's about 59 million, 60 million laptops produced a year now. And the last report I saw suggested to all of these new very mobile flexible devices are likely to increase that substantially over the next fives years. And I think it can only bode very well for the LED industry because it's clearly the right solution for that market.

GUENTHER HOLLFELDER: Thank you very much.

OPERATOR: Johannes Ries, Cominvest.

JOHANNES RIES, ANALYST, COMINVEST: Follow-on to the question we just cast before with Guenther. Maybe you could give us a feeling about the potential you talked about, laptops now at 5% and if I got it right do you mean it could go up to 20, not just an increase of 20%? What was -- again, to repeat it, maybe use 20% of all notebooks and maybe 20% of all TVs. What volumes you need or maybe how much capacity additionally we need in the LED space to cover this demand?

PAUL HYLAND: Well, that's a tricky one but let me try --

JOHANNES RIES: Maybe because there's a short cyclical downturn at the moment, it's very important to see what is the potential. Maybe at the beginning of a huge tornado of demand and so it's helpful for all people listening to this call to get a feeling what could come from a potential.

It's difficult to time it. I see the point. Whether it's today, tomorrow, but I wanted to ask the feeling how big the potential market will be?

PAUL HYLAND: I will try. I think we're also well known, probably, for being, we believe, cautiously realistic. I don't think we can ever be accused of talking up or glossing up the potential outlook. But clearly significant, it's all in the timing. And I think some of the recent announcements, I can remember some numbers in the context of laptops.

Most of these numbers to me seem very ambitious. I think for laptops, currently, there's about 3 million laptops produced in 2007 with LEDs and they represent something less than 5% of the total number of LEDs made today. So with that map, there must be some 59 million laptops a year, 59 million, 60 million laptops produced each year.

Now iSuppli recently brought out a report, and I have to say I still think this is ambitious, they talked about that rising to something like 17.5, 18 million in between now and 2012. Even that seems quite ambitious to me because that's nearly a 30% penetration, but, maybe.

However, other players, I've seen people like Taiwanese players, maybe they are sending a message out, but they talk about they're predicting we ship 2.5 million in 2008. And I think (inaudible) said 3.5 million and there was a couple of others, also, talking about the 1 million to 1.5 million. Some of that may be marketing speak but I certainly think it's going -- there must be a substantial increase in 2008 over 2007. A lot of very hard work has gone into qualifying these devices. A number of people have made announcements about getting qualification from backlighting supplies. But I don't think it's going to be anything near that sort of magnitude.

But I think you're going to see a steady year-on-year increase in laptops. What the rate is, I honestly don't know, Harry. That's the honest answer. We constantly look and watch but there is so much variety in the messages, all of them very optimistic, that suggest that it's going to be good. It's just a question of how good.

I don't believe this industry is suddenly going to go from 3 million to 9 million in 2008. I think that's far too ambitious. But, nevertheless, it's going to increase.

JOHANNES RIES: But only from the volume what it would mean maybe from today's production capacity how much will be leveraged and even if the TV would be covered by 10%, would it mean the market would be doubling or tripling or so for LED demand or only to have a feeling about potential?

PAUL HYLAND: Well the key --

JOHANNES RIES: Nobody would say you have sets of [speakers] and --

PAUL HYLAND: Well, what we don't know is, of all this capacity that's been going in over the last 12 months, what that constitutes. Maybe that constitutes 10% or 15% in terms of potential. We really don't know.

But I think we still stand by our view that you're going to see a pause. But it won't just be laptops that drive the start of the next investment cycle. And I think we're already starting to see some quite clear evidence of people now beginning to produce things like street lights. I think we're seeing --

I've seen two or three announcements on people producing LED street lights in the last month. There was Taiwanese player talking about some, I think it was One Star, talking about they had received an order for 16,000 street lights and someone else had also received another order from the U.S. for 1,500. So these new applications are also complementing the growth in laptops.

I think I've said many times before but I honestly don't recall such a promising outlook if we look forward now than any time in the last six years I've been in this job. The applications are clearly growing. It's just the timing issue. We've got great market share, we're doing extremely well and products are still going through, it's just the timing.

JOHANNES RIES: Only without maybe try to push you again to any figure but we are just at the beginning.

PAUL HYLAND: I think we're only just at the very beginning. Really, if you look back over the last five years what, besides the mobile telephone, can you say has had a sustainable demand for LEDs? Now that's really changed dramatically in the last, I'd say, 12 to 18 months. We have laptops, we have even the first televisions, we have street lights, we are seeing many, many more LEDs being used in displays and lighting and the holy grail of solid state lighting is clearly closer but we still believe we've got a few more years before it becomes really significant.

JOHANNES RIES: Super. Now maybe more on the day-to-day business, the guidance. You have some nice sharp about maybe the EUR 50m to EUR 80m in your guidance model on order intake you make your guidance. When are you going to give us the ability how risky this forecast is? Is the duration for an order to deliver to my knowledge around four to five months, is that right?

PAUL HYLAND: That's typical. But if we can -- if it's a significant customer, we've been talking to him, we can see it coming, sometimes we can do it in a little bit less but certainly we are seeing more customers who are keen to place more than one system, multiple systems, and schedule systems.

And I think this makes it sometimes a little bit more difficult this year than last year for investors because the beginning of last year the order intake in Q1 you could almost use as a measure of the revenue in Q3. But that's changed. That's really changed since late last year when customers started to lay out orders in advance. And I think, partially, to ensure they've got the capacity. But we stick rigidly to this rule. If you don't give us the money, if you don't give us the dates, we don't announce it as an order value until we get that in place.

JOHANNES RIES: Maybe you could come back to the start of the question, nearly most of the orders you get up to the end of August you will so far maybe to deliver this year, you can deliver (inaudible) get to revenues here.

WOLFGANG BREME: Of course we -- it was not a question before from Bill Ong. If we have orders in there, for instance, for OVPD systems for all that or organic applications, those orders are shipped and the final customer acceptance is open.

So we have the money, some orders we have the money maybe on 100%, but this is a little bit hard to predict. So this is why we too, for instance, something out of the backlog because those systems it's really systems which needed a lot of engineering together with the customer before they are accepted. So this data would completely fall out of this year. Though it's -- this six months, say, of delivery or lead time rule only applies to standard systems, not for those big ones. The big ones have really big order values, much higher than the others.

PAUL HYLAND: Maybe I cannot answer your question in another way. I need another EUR 50 m of orders to get me into my guidance zone and I need EUR 80m to hit the very top end. I'm not losing a lot of sleep over that as I talk.

JOHANNES RIES: That's (inaudible) my feeling. And now finally, coming back to Guenther's question on the margin side, you said you don't believe you can chose a (inaudible) for the whole year? You even explained that higher revenues are not directly leading to higher epic margins but maybe if currency -- the dollar mostly a benefit, first signs maybe that the dollar maybe gets stronger because Europe and economy cools off, except for maybe could it be -- or let's ask this way. You are not so hedged that currency, if it moves in the right direction for U.S. notebook positive bottom line impact?

WOLFGANG BREME: That's what I tried to point out. We don't hedge two or three years out. And we are currently -- I'm currently, honestly, the same what you said so we have some but no majority open hedging positions still for this EUR against the dollar and we are currently, honestly, waiting because we don't think it's wise to hedge at this level of $1.53, $1.54.

But of course it's hard to predict. But to make this very clear, the guidance of EUR 270m to EUR 310m (inaudible) EBIT is based on today's exchange rate levels.

JOHANNES RIES: So it's definitely, despite hedging, a positive leverage if the dollar gets stronger. That's important. Thanks a lot.

PAUL HYLAND: I think Wolfgang said earlier, some [oscillation] on the gross margin during the year but it doesn't impact on our EBIT target.

JOHANNES RIES: Thanks a lot.

OPERATOR: Uwe Schupp, Deutsche Bank.

UWE SCHUPP, ANALYST, DEUTSCHE BANK: Sorry if some of the questions have already been answered, I was slightly late in the call. So I will try to be quite quick. Two questions on compound and one on silicon. Firstly, maybe starting on compound, it's probably a bit more high level question but I would be glad to get an answer here.

As you start to talk to, obviously, more bigger customers or definitely bigger customers than you are, which historically was just the opposite way where most of your customers were fairly small, is there a risk, obviously, or is there a bigger risk of a more short-term [vision] in terms of how far orders could oscillate? In other words, I would guess that those customers that you talked to earlier like TSMC and Chimay and so on, that these guys are obviously ordering a bigger amount of equipment at a given time? And how far -- does that really influence your forecast ability or is that an issue at all?

Then, secondly, on the current development of long-term purchase agreements, is there any signs of slow down just like in quarter activities that you are seeing here? Just see if you could spend a word on that. How quickly do the bigger clients currently order or request the equipment? And how do you see that spread out over the coming quarters?

And then, maybe lastly, on the silicon side of the business I notice on slide four of your presentation where you were talking about the next generation tool of Genus to be ready in 2008. Just wondering whether you could get even more precise on timing, whether we were talking about (inaudible) or whether we're talking about end of year and also potentially whether you are targeting a slightly higher -- well, bigger market or different customer structure versus a historic customer base or is it only, again, a tool for the traditional customer base, if you will, in Korea? Thank you.

PAUL HYLAND: First of all, the question of the new customer size issues. I think we did touch on this. I presume you weren't on the call, Uwe, and that is there has been discussion on this point before that we see increased interest from what I would call downstream customers. In other words, maybe backlight suppliers or larger suppliers who were previously involved in buying LEDs interested in investing as the industry they are serving begins to grow.

We did acknowledge that many of the names that were bandied around are, indeed, talking to us and I'm sure everyone else and we continue to have very good, fruitful discussions with them. Many of them, of course, will not want to be mentioned.

But I think the common thread is the bigger companies of that nature typically are not buying on an opportunistic basis. They tend to have a longer term -- if you're coming in to that sector, they are taking a longer term strategic view. And so, therefore, they typically are talking about longer term agreements of larger volumes but it's still very early days.

In order for these guys to really enter and participate, they need to have the infrastructure, the skill set, the experience and so it's not a big bang scenario in my opinion. You won't see any of those big guys suddenly taking 50 systems because there's no one in this world who is capable of taking a big bang delivery.

But, yes, we definitely are having discussions with a number of new customers who are interested in entering that field.

Your second question, I think, related to long-term orders. We are certainly getting more requests for longer schedules. I know it's placing orders further out in order to, I guess, guarantee a commitment from us to be able to deliver systems to them. And we're quite happy to do that. But we're not happy to report them as orders if we don't have an order, we don't have a delivery date and we don't have a deposit. So we still stick very rigidly, whoever you are, to that order recognition policy.

So it means that, yes, we are taking orders for 2009 and there are people who want to be able to pencil in a commitment for then. Some of them may be reporting on our order backlog but many of them are not. But certainly, for us, it's so much healthier because we can look -- we've increased our manufacturing capacity considerably, really progressively over the last three or four quarters and the longer schedules give us a better chance to plan our manufacturing more efficiently and, indeed, on the materials logistics side.

UWE SCHUPP: I'm sorry to interrupt you. You won't give us a figure here, again, for how big that hidden order, backlog as I would call it, is indeed?

PAUL HYLAND: No. We would not do that because I think even if we have a purchase order and everything else, we firmly believe a real purchase order is when both parties have committed themselves in full to the delivery of that system. And I think that's a key principle that I think has helped us to have a much more stable order backlog and revenue prediction than perhaps maybe some other companies benefit from.

UWE SCHUPP: And did LPTAs increase sequentially or were they also flat?

PAUL HYLAND: There is more discussion about both multiple loan orders and LPTAs, a whole range. Even if there weren't new players coming in, it's exactly what I would expect in a market that is clearly growing and beginning to tool up for bigger end applications.

UWE SCHUPP: I see. Thanks.

PAUL HYLAND: The last question about new tools, I'm sure you won't be surprised by hearing me say we're not going to be specific about precisely when or what. But certainly we are getting excited about the prospects of launching a new silicon tool during the course of 2008.

UWE SCHUPP: But you won't or you wouldn't like to elaborate a bit more on potential additional market opportunity given the dire state that your silicon business (inaudible) is in?

PAUL HYLAND: No. I think it's probably unfair to talk about us having a dire state of -- I think you're talking -- you're really describing the memory market. And even that, I think, is beginning to show one or two small signs, several comments about bottoming out, and people beginning to invest. I don't think we're at the very end of it, yet. But there are some encouraging signs that perhaps the market is beginning to find a little bit of stability. We've seen the contract prices begin to be raised by people like [Heinicks], in the most recent. And by the way, Heinicks and [Fronroth] have made an announcement just today extending their relationship. And they are both two very good customers of ours.

So I think we may be starting to see an end to it but there's probably a little bit more pain left in there. But we are a very strong player in the memory market and so you won't be surprised if these new products will be clearly next generation memory with lower costs of ownership enabling our customers to compete in what is becoming a particularly volatile industry.

UWE SCHUPP: And I implicitly assume that you are also with this new tool also targeting some of the more non-Korean players around in the memory market?

PAUL HYLAND: We have no prejudice against any customers. We like to deal with them all, Uwe. Of course. It's a global market and you'd be disappointed if we weren't talking to all of them.

UWE SCHUPP: Thank you very much. Keep up the good work.

OPERATOR: Steve Babureck, Exane BNP Paribas.

STEVE BABURECK, ANALYST, EXANE BNP PARIBAS: Paul, could you please share with us your view regarding your solar business development this year? Also, [IMEC] announced a pretty good breakthrough in terms of solar efficiency and is that right that you collaborate with IMEC on the solar activities? And could that have a positive impact on your future revenue with this business?

PAUL HYLAND: They are only about an hour away from us and we have got a long history of working with IMEC and it's one of the true centers of R&D. So we have a number of projects both in compounds and in silicon going on at the moment.

In terms of 3/5, 3/5 solar cell is not a huge part of our business today. In terms of efficiencies, the solar efficiencies are being shown with compound devices, in the lab, are significantly above I think anything you would find in the traditional silicon cell to cell market. But there is still a huge gap in terms of cost.

So whilst we do sell systems and have sold systems, more recently we sold systems into Asia which is a relatively new development, several systems gone into Taiwan and also elsewhere in Asia, it's still not a huge portion of our business.

I think the industry still needs to get to a point where it not only can extend the advantage of efficiency but also has to get the costs down. And I think that's becoming even more true. I've read recently that there's going to be a phased reduction in subsidies. I think Germany is probably going to be the first to do that progressively over three years. So the cost of ownership issue becomes very much more important and compounds still has to really address that to become truly commercially competitive. There's more work to be done but it's a very small percentage of our business today.

STEVE BABURECK: Thank you. Just a follow-up regarding your market share. I know we already talked about it this afternoon but one of your competitor -- well, the largest, targets a 20% to 25% sales growth this year in the LED equipment business. So does that mean that you are clearly -- well, you continue to gain market share and, if so, could you please tell us which segments exactly if it's in backlighting or else?

PAUL HYLAND: Steve, this whole situation with the market share, nothing has changed substantially really in the last five years. We use people like VLSI who look at this on a regular basis and it's not an easy thing to do because to do a like for like comparison, you really have to strip the numbers apart.

Last year, in 2006, I think we were about 62% market share to -- the next biggest competitor was about 20% and there was about 18% in two principal Japanese players. If we look at the numbers today, we've probably had a big jump, probably around, maybe even, 70% market share. But that's an extraordinary jump. Typically we've gained one or two percentage points on average over the years. Sometimes we lose maybe a few, sometimes we gain a few. But we typically have never been very far away from that mid to high 60's.

I think the high market share we probably see in 2007 reflects that our competitors still are caught buying technology and may not recognize all of the revenue yet but when that all unravels, there's absolutely no market share change that I can perceive and it's nonsense to try and judge it a different way. It's just based on revenues. And if you add up all the revenues and you strip everything else out that isn't compound MOCVD for LEDs, then I think you'll see that the numbers have not changed.

I'd be very surprised if Aixtron can get much bigger than 70% market share because strategically, even our best customers want to be able to have more than one source.

Market share we're obviously very pleased but not complacent with our position. But there is no sign at all of us losing market share.

STEVE BABURECK: Thank you very much.

OPERATOR: (OPERATOR INSTRUCTIONS) Pierre Maccagno, Needham & Company.

PIERRE MACCAGNO, ANALYST, NEEDHAM & COMPANY: Can you talk a little bit about the shift in the wafer sizes? I don't know if you get some of that information? How is that coming along or what do you expect for the coming year?

PAUL HYLAND: Still very much dominated, very much dominated by 2 inch wafers for the volume market. However, if we turn to the premium tier 1 players, then there is already a movement towards 3 and 4 inch. We've even seen people talking to us about 6 inch. But at the high volume end, it's still dominated by 2 inch wafers.

PIERRE MACCAGNO: So your equipment can easily be upgraded to the larger diameter?

PAUL HYLAND: We don't really mind. If you were to buy a (inaudible) system from us, if we could ever make a wafer big enough, you could do it on 300 millimeter. It's a question of the substraight, the susceptor insert in the reactor design that enables you to define -- you define the wafer size, we give you an appropriate susceptor package.

PIERRE MACCAGNO: How does the industry shift -- it's not necessarily the fact that there will be more acquisition of new equipment. Correct? It'd just be upgraded?

PAUL HYLAND: Well, I think it's more complicated than that because clearly, as we've just been talking about, what enables you to compete in these new high value markets is being able to get both high performance, high quality and low cost devices. And typically, each generation, when you come into a new application, the system you can buy, your return on investments, is quite often -- will lead you towards buying the more efficient systems. So it's not just simply a question of upgrading.

And in any case, customers don't want to do that because it's not as simple as it sounds to run the same process on a 1, 2 inch wafer and then shift it to a 4 inch. It really isn't like that. The process window is too narrow.

PIERRE MACCAGNO: So most of the machines you are seeing now are for 2 inch then?

PAUL HYLAND: 2, 3, 4, 6 inch, as well. It depends on who the customer is, what the application is and how well developed their process is.

PIERRE MACCAGNO: And then during the quarter, do you have any larger than 10% customers?

PAUL HYLAND: Do we have anyone in the quarter for Q1?

WOLFGANG BREME: In the quarter we don't disclose this. In the year-end we have Samsung is more --

PAUL HYLAND: Full year. Yes. Because they are both a big customer for compound and silicon, too.

PIERRE MACCAGNO: And then, lastly, your CapEx for '08, what is it?

WOLFGANG BREME: CapEx for '08 with our amortization if you just take last year amortization, our depreciation was EUR 10m in that range and we expect capital expenditures in the same range for this year.

PAUL HYLAND: I think what is important for you to remember here is we have about 90% outsourced manufacturing facility now which means it's not -- CapEx is not driven by volume increases. We can certainly continue to manufacture significantly more than we're manufacturing now. It's principally driven by mostly R&D. So the closer we come to a new product, the more metal we cut and the more CapEx we put systems into our labs or customers labs. But it's not a ratio between volume and CapEx.

PIERRE MACCAGNO: Great. Thanks much.

PAUL HYLAND: Well I think, Operator, if there are not any more calls, not any more questions?

OPERATOR: There are no further questions left.

PAUL HYLAND: In which case, I'd like to thank all of those callers who are still on the line for attending this call and look forward to speaking to you all at the next quarter.

GUIDO PICKERT: Thank you very much.

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