Aixtron cuts guidance by 26%. What happened and what does it mean for the LED industry?
Aixtron today cut its 2011 guidance, lowering its 2011 revenue outlook from €800- €900M to just €600- €650M. Taking the midpoint of the guidance, that is a dramatic 26% decline from July 28th when it reiterated its 2011 guidance It also lowered its EBIT margin guidance from 35% to 25-30%. What happened to Aixtron and what does this mean for the MOCVD and LED markets?
On the July 28th call, Aixtron reported its 1H’11 revenues at €381M and:
- Claimed they had a shippable backlog of €324M
- Assumed 2H spare & non-equipment revenues of €30M
- Required shippable equipment orders of €65-€165M by 9/30/11 to meet its guidance.
Aixtron’s July 28th guidance indicated that 1H revenues + backlog + spares equaled €735M. So, their shippable backlog is in question. Aixtron goes to great lengths during its earnings calls each quarter when discussing the quality of their backlog, so this is somewhat of a surprise. They don’t include an order in their backlog unless they have an official PO, a deposit, a delivery date and they only record orders whose revenues are within 9 months. They claim their backlog definition is tighter than other equipment companies.
So, in order to reduce guidance to €600- €650M, they would have to reduce their 2011 shippable backlog. Aixtron did announce a reduction to their previous backlog of €374M, of which €324M was shippable in 2011, by €100M to €274M. They reported that they were taking this step to reflect the increase in conversion risk, PO days and deferred system delivery requests to 2012. One would expect that GCL’s reported decision to exit LEDs as indicated in our recent blog contributes to this reduction in backlog. If we reduce the shippable backlog by that same €100M, then we end up with 2011 revenues of €635M, right around the mid-point of their guidance assuming no other delays or cancellations and no additional orders taken in Q3’11 and Q4’11 and converted to revenue in 2011. Given that leadtimes have shrunk to 3 months and we already reduced the shippable backlog by all €100M, this does seem somewhat conservative.
What does this mean for the 2011 MOCVD market?
Equipment accounts for around 93% of Aixtron’s quarterly revenues and LED equipment accounts for around 90% of its equipment revenues. Using the mid-point of its guidance or €625M minus 1H’11 revenues of €381M, 2H’11 LED equipment revenues would be around €202M. With its ASPs at around €1.43M per tool due to rising discounts, this translates to 2H’11 MOCVD tool deliveries of 141 units vs. 1H’11 tool shipments of 205, a 31% decline.
We were expecting Aixtron to ship 213 GaN MOCVD tools in 2H’11, so their new total MOCVD number is 34% lower than just our GaN number. If we assume non-GaN is 5% of their shipments, then their reduction in guidance reduces the MOCVD market by 79 tools which would bring the market size down below 800 tools if these orders are all lost.
This begs the question are all of these tool shipments lost or does Veeco take some of them. Also, will Veeco see a similar fall off? Veeco overtook Aixtron for the first time in Q2’11 if we assume that all its shipped MaxBright reactors were recognized in Q2’11. Thus, some of the lost business could be going to Veeco. However, given Aixtron’s backlog rules, it seems more likely that it is a result of delays and cancellations. Veeco could certainly see similar delays, but the delays are also customer specific and GCL is a large factor which we believe Aixtron booked and then may have had to cancel.
Other than GCL potentially exiting, we are aware of other LED manufacturers delaying planned 2011 installations to 2012. This trend may be continuing due to weak market conditions in the LED industry today with backlighting underperforming vs. expectations on slow demand in developed countries and price sensitivity for more expensive LED models in developing countries.
Another reason could be the lack of expiring MOCVD subsidies. The latest 5-year plan in China continues to stress LEDs and the subsidies do not appear to be expiring as early as expected. Thus, there is less reason to take the tools today when they could delay them till 2012 when market conditions are forecasted to improve and yields are also likely higher generating a faster payback on their tool installations.
Other factors pointed out by the company today and on its last call include the fragility of the economic recovery leading to investment caution, tighter credit in China, etc.
One can also conclude that the weak market conditions downstream being experienced in packaged LEDs are finally moving upstream with this large reduction in Aixtron’s revenues and profit margins. In addition, sapphire prices at 2” and 4” have also recently taken a beating, with a number of sapphire suppliers experiencing significantly lower margins.
On the other hand, delays today mean tighter supply in the future. We have been forecasting large surpluses in LED supply/demand, so a smaller tool market will reduce pricing pressure and lead to a healthier LED and MOCVD market in the future. The quesion is when and the answer is see our next report…:) Nonetheless, it looks like the whole LED industry is now in for a bumpy ride and there is more riding now than ever on the near term success of LED lighting.