ams OSRAM AG

SIX:AMS

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good morning. Welcome to the ams First Quarter 2018 Results Conference Call. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcasts. [Foreign Language]At this time, it's my pleasure to hand over to Mr. Alexander Everke, CEO; Mr. Michael Wachsler-Markowitsch, CFO; and Mr. Moritz Gmeiner, Head of Investor Relations. Please go ahead, gentlemen.

[Moritz M. Gmeiner, Senior Director of Investor Relations]

Good morning, ladies and gentlemen. This is Moritz Gmeiner. I'm happy to welcome you this morning to our conference call on the first quarter results. As usual, Alex will run you through the developments in our business, then Michael will give you more details on our financial performance. And without further ado, Alex, please?

[Alexander Everke]

Thank you, Morris. Good morning, ladies and gentlemen. I'm very happy to welcome you to our first quarter 2018 conference call this morning. Let me first give you some key financial figures, Mike will later take you through the financials in detail. Our first quarter revenues came in at $452.7 million, well within our guidance range and up 147% compared to the first quarter last year. Our adjusted gross margin excluding acquisition-based and share-based compensation cost was 36% in the first quarter. Our adjusted EBIT, excluding acquisition-based and share-based compensation cost, for the first quarter was $77.3 million or 17% of revenue, in line with our guidance, which was more than 15x last year's level. Our business showed a solid performance in the first quarter and recorded strong year-on-year growth despite customer volume effects that had an impact on our consumer business. This positive result is based on the strengths of our differentiated sensor solution portfolio, while we continue to pursue our strategy to capture multiple long-term growth opportunities. Let me look at the developments on the consumer side first. Our Consumer & Communication business start into the year on the positive, but more balanced mode in the first quarter. While our consumer solutions continue to be successful in the market, this success was moderated by customer-driven volume effects in our smartphone business, which we experienced in the first quarter. We had previous inventions that we expected customer volume effects in the first quarter, however, the external end-market development drove more pronounced volume effects for the quarter. As a consequence, we saw a somewhat more meaningful impact on our consumer business in the quarter from customer performance and related volumes. Despite these short-term effects, we are the leading player in optical sensing and provide high-performance optical sensing solutions to our world's largest smartphone and consumer OEMs including 3D sensing optical systems, True Color display management, proximity sensing and other optical sensing applications. With the focus on emerging applications, we continue to drive innovations around optic technologies for long-term growth markets. Our optical sensing portfolio spans a wide array of hardware and software, and here we recently added leading software IP for 3D face recognition through the acquisition of KeyLemon, which closed in the quarter. While we experienced a more difficult short-term demand environment in the smartphone market, we see consumer OEMs actively engaging with us on 3D sensing and other new upcoming sensing functionalities, all driven by the need for differentiation. We pursue our comprehensive multi-generation roadmap in 3D sensing based on our broad portfolio of relevant technologies. At the same time, we prepare for significantly broader adoption of 3D sensing in the consumer markets. Besides the large 3D program win in Asia that we were able to disclose a while ago, we are strongly involved in 3D sensing design activities at several mobile device OEMs. We currently expect potential additional 3D business to start from the very late 2018 onwards. Our VCSEL and VCSEL driver capabilities are a key element of our 3D sensing portfolio and we see strong market traction continued in this year. The ams specific VCSEL technology, we are able to leverage -- create clear competitive advantage for our 3D sensing strategy when we look at the coming years. We believe that some of these advantages will become more relevant in the future as we focus on where technology is going and not where technology is today. Moreover, given the complexity of 3D sensing, our broad solution expertise is another important differentiator as we build a leading position in the 3D market. We also work on extensive product development in future areas of optical sensing including spectral sensing for mobile applications such as color match and food sensing. Market traction in this new area clearly continues to increase and we expect first small-scale shipments of spectral sensing solution for an Asian mobile consumer OEM before the end of 2018. At the same time, our spectral sensing solutions for high-quality blood pressure measurement is seeing more and more interest from consumer OEMs that are exploring ways to create new mobile device applications with our technology. We are also developing other multi-sensor solutions for consumer applications such as audio and pressure sensing combinations for mobile devices. All of these activities focus on our 4 sensing areas and allow us to access new growth opportunities for the coming years. Our other consumer product lines including audio solutions saw continued attractive run rates at the range of device vendors and contributed positively to our first quarter. Let me now come to our other areas of the non-consumer side. Our industrial, medical and automotive business had a good start into the year in the first quarter, performing in line just slightly ahead of expectations. In industrial markets, the overall demand situation remains attractive across product lines for automation, building control, HABA and emerging industrial IoT. Our strong position in industrial sensing is built around innovation and the ability to support challenging applications for major OEMs and their customers. In imaging, we recently received an important industry award for a highly innovative industrial imaging solution. Our medical business recorded another quarter of attractive results as we extend our medical imaging portfolio for computer tomography, digital X-ray and mammography and work to expand our OEM customer base. At the same time, we are focused on advancing our NanEye miniature camera technology. Our automotive business also continued to perform well with its broad range of solutions for safety, driver assistance, position and chassis control. We are encouraged by the early large program win for VCSEL illumination in automotive 3D LIDAR, which we announced recently. The projected lifetime value of this win has since increased by more than $500 million to over $1.1 billion for this program alone. This impressive development clearly demonstrates the very large scale opportunities for 3D sensing in the automotive market. Our success also confirms the key relevance of solid-state LIDAR technology for autonomous driving systems and the path from level 3 to level 4 system deployment. Our unmatched ability to combine very high power VCSEL and advanced driver circuits into highly differentiated illumination solutions create significant competitive advantage for this long-term market as market interest continues to grow. In addition, we see -- we are seeing increasing traction for innovative 3D sensing opportunities in-cabin, that is inside the vehicle, where we offer broad expertise in the range of relevant technologies. Here we are close to design success with a different Tier 1 automotive supplier for small volume in-cabin 3D application. All in all, automotive 3D sensing is quickly becoming a very exciting area of opportunity in design and potential for ams. Looking at our VCSEL strategy, the investment into internal VCSEL manufacturing line in Singapore is progressing to plan, and we are confident about our ability to support large-scale internal production of differentiated high-power VCSEL in 2019. Let me now come to the outlook of our business. For the second quarter, we expect a significant short-term impact in our consumer business from strongly accelerated customer-driven product transitions, which are related to large smartphone programs. We have now received confirmation that the product transition and large-scale customer programs in our smartphone businesses is strongly accelerated by the customer. That means the current products are being deemphasized substantially faster compared to previous generation-to-generation changes, with strongly negative volume effects for ams. Given the relevance of these programs, this development will have a significant short-term revenue impact on our consumer business. On the other hand, our non-consumer business are expected to continue their solid development in the second quarter. As a result of these impacts, we expect second quarter revenues of $220 million to $250 million, which will still be up between 10% to 25% year-on-year based on available information. First half revenues are therefore expected to show strong growth of 87% to 96% compared to the first half of last year. As previously mentioned, we are preparing for major ramp-ups in the second half 2018 related to high-volume optical solutions for consumer 3D sensing application among others. To this end, we focus on making sure that all required resources for the substantial ramp-ups we see coming up are available as needed. Consequently, and to avoid unwanted risk, we do not pursue short-term reduction of our trained workforce in our Asian manufacturing locations, even though we see an impending significant underutilization of production capacity in the remainder of the first half. This underutilization is partly driven by the mentioned smartphone product transition and related volume effects. In addition, we have now received confirmation that product changes in a major consumer program ramping up later this year are not released for production by the customer yet and this prevents us from preproducing certain parts in the current quarter. This development will contribute further to underutilization in our Singapore facilities in the second quarter. We therefore see a situation that is very similar to the one experienced a year ago around the same time. However, we are now burdened by the full effect of depreciation and certain ongoing operating costs regarding the installed capacity. Driven by this underutilization of capacity and based on current information, the adjusted operating margin for the second quarter, excluding acquisition based on share-based compensation cost, is expected to be significantly negative at around minus 20% to minus 25%. However, looking forwards to our future years, we do not expect a recurrence of such short-term transition effects on a similar scale. This is because we see a ramp-up seasonality within the year to be more balanced from 2019 onwards as we expect to have a broader base of consumer OEMs in optical sensing. Furthermore, and despite the short-term volume effects, we remain convinced that our strong position and growth potential in several of the most exciting growth areas in sensing, which is underscored by the excellent market traction we see with OEMs across end markets. Our mid-term growth and profitability targets respectively, the 2016, 2019 period and onwards remain unchanged. Let me now hand over to Michael for more details on the financials.

[Michael Wachsler-Markowitsch]

Thank you, Alex, and good morning, ladies and gentlemen. It's my pleasure to give you an overview of our IFRS and adjusted consolidated numbers for the first quarter 2018. Let me start with our P&L and the top line development. Alex already mentioned that our first quarter group revenues were $452.7 million, a record level for a first quarter and well in line with our guidance range. As announced with the full year results, we have moved to presenting our financial information in US dollars from this quarter using currency conversion of the financial statement data. This is based on a weighted exchange rate consistent with the industry practice and our quarterly reports also include the underlying financial statements in Europe. We recorded a strong 147% year-on-year growth, while we saw a sequential decrease compared to the previous quarter as expected. However, as mentioned by Alex, customer volume effects played through in a more pronounced manner impacting revenues more than previously thought. Our adjusted gross margin, excluded acquisition-related and share-based compensation costs of 36% compared to 44% in Q1 last year. Our IFRS reported gross margin was 33% compared to 40% in Q1 last year. The gross margin development particularly reflects product mix and utilization effects in our production facilities in Singapore during the quarter. Our R&D spending was $61.5 million in the first quarter 2018 compared to $57.2 million in Q1 last year. In relative terms, this means 14% of revenues, which is only slightly above last quarter's level. Main reasons for the year-on-year absolute increase was the addition of design center and R&D resources over the course of the year. But there are always quarter-to-quarter movements in R&D spending, we expect a similar level in absolute terms in Q2 given our ongoing focus on R&D to drive innovation. We expect continued meaningful levels of spending for a number of platform developments and major product opportunities we work on for the coming years. We also see our long-term target for R&D spending now at well below 15% of revenues, helped by the growth we target for the coming years. Further down our P&L, SG&A costs were $43.7 million compared to $36.8 million in the first quarter 2017. As in the case of R&D, this absolute increase primarily reflects the higher SG&A costs we added from acquisitions and expansion of resources as well as certain higher IFRS 2 related costs. In relative terms, we spent 10% of revenues for SG&A in the quarter, which is strongly below last year's level, and only slightly up on a sequential basis. We expect about a similar level of spending in absolute terms in the second quarter. Looking forward, we have already updated our long-term target for SG&A costs to below 10% of revenues, and we continue to work towards that. Our other operating income of $3.9 million for the first quarter compared to $4.3 million in Q1 last year resulted for the most part from R&D support grants from Austrian and European R&D programs, which are tied to dedicated R&D spending for these programs. As a consequence, our adjusted operating result or EBIT excluded acquisition-related and share-based compensation costs for the first quarter came in at $77.3 million, a record level for a first quarter, or 17% of revenues, in line with previous guidance. This result was strongly up from $5 million or 3% of revenues in Q1 last year. The IFRS reported results from operations for the first quarter was $46.5 million or 10% of revenues, up from minus $16.9 million in the same period 2017. Our net financial result was $32.1 million, strongly influenced by several one-off noncash effects and compared to minus $3.2 million in Q1 last year. We recorded a large effect from the unwinding of the liability of the Heptagon earn out given the announced and implemented change in structure of the earn out payment and valuation adjustments. Moreover, we recorded a positive effect from a revaluation of a financial investment according to IFRS rules and a smaller effect from the unwinding of [indiscernible] transaction related to the Heptagon earn-out. Besides these effects, we recorded a larger effect from the change in the value of the option element of deferred currency convertible bond as required by accounting rules. The financial result also reflects noncash valuation adjustments for foreign currency balance sheet items and interest expenses. Looking at the adjusted net result for the quarter, this came in at $99.9 million driven by the significant one-off effect from the financial result and compared to minus $19.9 million in the same period last year. Adjusted basic and diluted earnings per share were CHF 1.20 and CHF 1.12 or USD 1.25 and USD 1.17 compared to minus CHF 0.23 and minus CHF 0.23 or minus USD 0.27 and minus USD 0.26 respectively for the first quarter 2017, which also reflects a lower share count last year. Our total backlog on March 31, 2018, stood at $345.9 million, down from $666.1 million we saw at the end of the fourth quarter 2017, and up from $240.4 million on March 31, 2017. The current backlog is at a similar level but at the end of March. Now let me give you some additional figures from the balance sheet and the cash flow statement to complete the picture. Our cash and cash equivalents, including short-term investments, stood at $525 million at the end of the quarter. This increase includes effects from the convertible bond issue in February. Our net debt position was $1.3 billion at the end of Q1, reflecting the converted bond issue last year and this year. We are required to account for the U.S. dollar-denominated convertible bonds fully assets whereas the option portion of the 2018 convertible bond is accounted for in equity. Our trade receivables stood at $316 million, slightly down from $350 million at the end of the fourth quarter. The decrease reflects the top line development. Our DSO ratio was 55 days, up from 48 days in Q1 last year. Inventories were at $301 million compared to $312 million at the end of the fourth quarter. The finished good portion of our inventory remained close to 25%. The liability side, we have a current debt position of $428.2 million, our long-term debt stood at $1.38 billion at the end of March. Our long-term debt was channeled, taken on to bolster liquidity, support CapEx, past acquisitions and potential future M&A. Apart from the recently issued convertible bond, the debt mainly consists of unsecured loans of a long-term nature. As mentioned before, this long-term debt position includes the convertible bonds based on the relevant treatment and the IFRS rules. Our operating cash flow in Q1 2018 was $56.3 million, up from $32 million we saw in the first quarter last year. This positive development was mainly due to a strong result and higher depreciation. Our CapEx in the first quarter was again significant at $174 million compared to $116 million in Q1 last year, reflecting further planned investments into capacity expansion for needs from the second half 2018 onwards. Long-term, our target CapEx to sales ratio is expected to be between 10% and 15% to support the ongoing growth of our business. And with that, I would like to open the floor for questions. Thank you for your attention.

[Operator]

[Operator Instructions] The first question comes from Achal Sultania, Crédit Suisse.

[Achal Sultania, Director]

Two questions from my side. First, on the -- can you talk about the utilization levels that you saw at a very broad level both in Q4 and Q1? The point that I'm trying to understand is that your gross margins went down from 40s to 36% clean this quarter and it seems like Q2 gross margins are going to be around 15% to 20% based on what you're guiding. So just trying to understand, like given the volatility that we have in gross margins, is it possible to do a 40% plus gross margins on a full year basis on a sustainable trend given that we will always have this kind of seasonality with your large customer in 1 quarter or 2 quarters in a year? So I'm just trying to understand what is causing this kind of -- what is the level of underutilization right now? And how much improvement you can make once you get to full utilization? Then I have a follow-up.

[Michael Wachsler-Markowitsch]

Yes. Good morning, this is Michael. Let me take this question. First of all, we're not guiding into the second half as before, but we clearly expect that the very strong underutilization we see now in the second quarter to reverse in the second half through large volume ramps with related positive effects on profitability. In the first quarter, certainly we had some progress mix effects and also certain underutilization, as you can see if you compare revenues in the fourth quarter, that was being fully utilized with revenues in the first quarter. We do not spread out any details on this effect, but I think it's obvious.

[Achal Sultania, Director]

Okay. And maybe a follow-up, Michael, on this -- like there was some expectation that your large customer is going to start to have an iPad or a tablet launch at some point, which probably will have facial recognition as well. Like given how you're guiding for Q2, it seems like none of that is actually included in Q2. So I'm just trying to understand, is it just a timing issue with the product? Or is it more about the technology being not ready as yet to be adopted in tablet devices yet?

[Alexander Everke]

Yes. Alex, here. Thanks for the question. So I think the technology from our perspective is the same or similar to iPhone from the concept point of view. We cannot give any kind of details of both product rental or customer, as you know. But we clearly see the second quarter as a very strong transition quarter between one generation to the other. And we are confident with the ramp in the second half, which includes this, but we cannot comment on different products launches of our customer.

[Operator]

Our next question comes from Andrew Gardiner, Barclays.

[Andrew Michael Gardiner, Director]

I just had a sort of couple on some of the near term. Firstly, in the first quarter itself, you mentioned that customer volume effects were greater than anticipated. But you guys sort of made the middle of the guided range in terms of revenue. Can you give us some sense as to what may have improved better than you'd anticipated to help offset? And then also as we look into second quarter, I think I can understand sort of what you're talking about in terms of the transition and this sort of inability -- it sounds like the specs aren't quite ready so therefore, you can't sort of "preproduce the parts." Presumably, you need to know relatively soon otherwise that steep ramp that you talked about will be even more difficult. When do you need to know by in order to get the tooling set and the ramp happening? Is that weeks? Is it sort of in the next month or so? A bit more detail there would be helpful.

[Alexander Everke]

Yes, Alex here. Thanks for the question. So obviously, the volume effect in the first quarter was more to the back end of the quarter. The ramp for the second half of the year, we are very confident, it's basically similar to last year's and this goes by a standard procedure between customer release dates and our readiness. We are ready. But of course, the customer release dates of their own products is the green light for our ramp-up production. And this is on schedule. But obviously, if this would have been earlier what we have expected, we could have done preproduction in the second quarter.

[Andrew Michael Gardiner, Director]

Okay. If I could just sort of follow up on that. In terms of the -- so the volume impact in the first quarter sort of declining late in the quarter so through March. Given how steep that has been and how much of a surprise it is, do you have any risk of sort of inventory obsolescence? Is that factored into the Q2 guidance at all? And then in terms of the second half ramp that you just sort of reiterated there, in February, when you guys gave -- when you talked about the full year, you were willing to say then that it would be similar sort of directionally to what you saw in 2017. I know you didn't want to quantify it at sort of the 120% or so that was in 2017, but you were at least willing to say it's a high double-digit half-on-half growth, is that still reasonable?

[Michael Wachsler-Markowitsch]

Yes. Andrew its Michael. First, let me allude to the second half ramp. I think we expect the strong ramp up as we said. The schedule of it is probably more like in prior years. And the magnitude obviously also depends on the smartphone market and where we see difficulties in that market or not, but we cannot assess now, I believe it's too early. And with regard to obsolescence, we don't have any inventory obsolescence or write-offs planned. I think everything else is in line with what we expected before and what we see how this year pans out.

[Operator]

The next question comes from Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

My first question was just -- if you could just give a bit more clarity on the reasons for the late spec change or the -- shall I say the lateness for them to give you the detail on the spec change. I mean is just that affecting the DOE projector? Or do you think it's affecting the entire 3D sensing system? And would that have an impact on your color sensing business? Because that fits on the -- adjacent to the DOE projector. Just if you could just give us a bit more understanding of what is going through the mind of this OEM? Is it -- because I would've thought this would be more of a software type thing, but clearly the hardware is obviously important too?

[Alexander Everke]

Yes. Alex, here. Well, as you know, we cannot comment on customer specifications and so on. But we don't see big changes to previous years when customers, in general, specified their products and then there is a certain period of time where the customers say now its released for production and this is the process we're going through here. Again, we see -- if you compare this to last year, it's very similar, but based on discussions we had we would've expected earlier release so that -- to enable us to have preproduction. And this is, unfortunately, not the case here. But we don't see any impact on that. That's why this is general setup for the second half ramp up, any impact on that.

[Robert Duncan Cobban Sanders, Director]

And then if given that you can't prebuild now and this looks like it's going to happen every year, I still can't quite understand if you're building for Q4 peak volume, which is obviously going to be very high compared to the rest of the year, how can you keep your Singapore line loaded through the year in any year? Because that is still something I'm struggling with, because in the past you've said you can make 30% EBIT margin in consumer, but to do that, surely that would assume that you could keep those facilities fully loaded through the year, and that doesn't seem to be something that seems likely anymore? Is that fair?

[Michael Wachsler-Markowitsch]

Rob, this is Michael. Let me take that question. I think there are 2 answers to it. First of all, we expect the ramp up to happen earlier this year than last year. And secondly, with respect to seasonality in upcoming years, I think we mentioned it, we start to see traction as we said earlier several times with Android customers. So in 2019 the earliest and if that is happening, what we currently probably can expect, then certainly seasonality is lower. Plus, in addition, and we mentioned it also, this spec change for a second generation must not happen every year. I mean this -- it happens this year, that doesn't necessarily mean it happens next year again. And if it doesn't happen next year then obviously, we can do that preproduction and we can somehow mitigate that effect.

[Operator]

Next question comes from Sandeep Deshpande, JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

I have 3 short questions if I may. Firstly, Alex, regarding the first quarter of the year, when we look at your gross margin, which was slightly underwhelming, have you already started ramping up the capacity that you need for the second half of the year based on whatever customer indications you have? Secondly, do you already have customer orders for the second half of the year, and of course, the exact numbers may change and that's based on a rolling forecast, but based on how -- do you have orders for the customer already regarding how much capacity you should build for the second half of the year? And thirdly, in terms of your second quarter guidance, in terms of margin, of course there is a large part of fixed cost associated with DNA in there, so is there going to be -- if you exclude the DNA, would there still be a cash loss in the quarter?

[Alexander Everke]

Yes, Alex here. I'll take the first 2 questions. So yes, you're right. In Q1, we're starting to add capacity according to the ramp-up plan we discussed with the customer. This is very similar to last year, and we have to add capacity too based on the forecast we receive from the customer for the second half. And this is also the answer to the second question. It's exactly the same procedure as last year. We based our capacity expansion, which relates to tools and also headcounts -- people, based on confirmation of the forecast from our customer. This is exactly the same as last year.

[Sandeep Sudhir Deshpande, Research Analyst]

And the third question, sorry.

[Michael Wachsler-Markowitsch]

Yes. It's Michael. Let me take the second question. It's regarding the cash. Well, we certainly need to go through the quarter to see what is happening. As we said, we have ongoing CapEx requirements to prepare ourselves for the second half of the year and later on. Then we have our dividend payment in the second quarter. So it's -- I guess it's probably around the 0 line.

[Sandeep Sudhir Deshpande, Research Analyst]

Okay. One follow-up I have for you, Alex, which was, in terms of the ramp that you have of the product in the second half, what we understood in your last set of results was that you have a potential for content increase in the second half. Does that still exist, the potential for the content increase?

[Alexander Everke]

Yes. The potential still is there that you see content increase, we see it for this year, but we also see it in areas, which will come up next year also with other customers.

[Operator]

The next question comes from David Mulholland, UBS.

[David Terence Mulholland, Director and Equity Research Analyst]

I's just following up on the last point, but I guess, like-for-like, as we look into the second half, your commentary from 2, 3 months ago was very much to see pricing going up, I guess versus where you were 2 or 3 months ago rather than just like on a year-on-year basis. How do pricing expectations into the second half sit today? Because I guess that's part of the question everyone is trying to get to on the second half outlook. And then secondly, when do you actually think you will get a bit more commitment from Android OEMs to 3D sensing and actually be able to talk a bit more design wins for 2019? Is that something that might actually come this year? Or will we be waiting till next year to get that?

[Alexander Everke]

Yes. David, thanks for the question. Alex here. So the statement is exactly the same as last time. We see pricing goes up because of content increase and higher complexity, but obviously we're still in discussions with customers. And this is a standard process, exactly the same as last year. The Android camp, we see very strong commitment from those guys. We are in discussion with nearly everyone. We see a very, very strong engagement there. But as I mentioned last time and also last year, we clearly see that it's a very high complexity for those guys to implement those systems. And we are there to support this and trying to implement this with them together. But it's a very technical, complex situation for the Android camp, and we see different approaches, as I mentioned last quarter, different approaches from those customers in which direction they are going.

[David Terence Mulholland, Director and Equity Research Analyst]

And one quick follow-up. Obviously, whenever you did the Heptagon deal, it was understood there was a kind of commitment from a customer given the CapEx you were spending? I assume at this point that's now in the past? Or is there still any commitment from the customer regardless of what happens volume-wise on-ramp that you will get paid given the CapEx you're spending?

[Michael Wachsler-Markowitsch]

Yes. This is Michael, I'm happy to take this question. The customer offered us this possibility, and we're obviously discussing it since we have no conclusion on it yet.

[David Terence Mulholland, Director and Equity Research Analyst]

So there's potentially still a situation like that, that you could put in place this year?

[Michael Wachsler-Markowitsch]

Correct, yes.

[Operator]

Our next question comes from Michael Foeth with Vontobel.

[Michael Foeth, Head of Industrials Team]

Just 2 questions from my side. I was wondering, in your 3D sensing solution, what improvement have you made to the solution compared to a year ago? You mentioned it's basically higher specs, higher complexity, can you be more specific, what you've changed? And the second question is regarding your CapEx expectations for this year, can you just update us what you expect there?

[Alexander Everke]

Yes. Alex here. Your first question, yes, there is continuous improvement from 2 angles; one is what we are driving, this is based on power consumption resolution, form factor and so on but also what the customer is requiring. But there we cannot go into detail. And we have quite some new concepts in the pipeline we don't want to reveal, especially in the area of the Android implementation where we want to help customers to implement more complex products more easily. But please understand we can't reveal what we're doing there.

[Michael Wachsler-Markowitsch]

And with regard to CapEx, this is Michael. I think there's no significant change to what we have said previously, it's going to be a significant number, but it's certainly less than last year.

[Operator]

Next question comes from Jürgen Wagner, MainFirst.

[Jürgen Wagner, Director]

You mentioned the increased lifetime value for your LIDAR project. How can that double within a couple of weeks? And when should we see first revenues? And second question, you mentioned there was no inventory obsolescence in Q2, but looking at what you report in the balance sheet in the cash flow, there was some difference in Q1, where is that coming from?

[Alexander Everke]

Yes, let me take -- Alex here, the first question. The 3D LIDAR is very, actually a very interesting business we're looking at. And as you mentioned, it increased significantly, and this is simply for the fact that our end customer not only have -- our system integrator has nowadays not only one large end customer but more customers are working with our system integrator and that's a very simple effect that therefore, the volume goes up. In addition, we're also looking at, even at the stage right now, to offer systems with higher resolution than previously requested. And this drives cost up and there for the ASP up. So it's a combination of more customers, more volume and we see an increasing ASP even. So it's quite positive. That interaction is very strong. I mean this is, as you rightfully said, that this happens in a very short period of time is quite impressive, specifically in the motor business.

[Michael Wachsler-Markowitsch]

Yes. And let me take the second question, its Michael here. I can confirm that there was no inventory depreciation or anything in the first quarter. And I do not expect anything in the second quarter. So we don't see it.

[Operator]

The next question comes from Lee Simpson from Stifel.

[Lee John Simpson, Analyst]

Maybe going back to some of the earlier questions, but trying to answer them maybe or asking them a little differently. You mentioned the possible preproduction ramp, but the customer is absent at this point, but if we look to the sort of Q3, Q2 transition that's normal for a business like this, do we see anything out of line with that normal transition given the size of ASP uplift that you expect with new generation designs? Maybe secondly, just looking again at that underutilization in Q1 and Q2, could you maybe tell us what is the qualification time for new tools? And if it is 3 to 6 months, is it possible that we get a 40% plus gross margin in Q3 of the cost back over let's say 350 million sales. And maybe a last one from me is, what is -- what can you tell us around architectural changes for 3 DS in 2020 timeframe and perhaps the mixed use of new materials and others? Where does that leave ams? And do you think there will be a big architectural change in that timeframe?

[Michael Wachsler-Markowitsch]

Yes. Hi, this is Michael. Let me take your question on the margin development. I think, as you have clearly seen in the first quarter and also guided for in the second quarter, there is a strong dependency on the utilization rate of our production facilities to guide to anything here. So clearly we have our expectation with the ramp up and how it goes into the quarter. But there is a strong dependency, as Alex said before, on the release date of the next generation programs. We're currently installing additional capacity, we get this capacity qualified. And as soon as this is done and the product is released we will start ramping and whenever this is happening in a quarter or in a month, it certainly drives the gross margin development. So it would be pure speculation to say anything whether this is happening now or then because it's a matter of timing.

[Alexander Everke]

Yes, and then to your first question, the transition in Q2, Q3 -- Q1, Q2, Q3 is actually very similar to last year. The difference is that this year we have installed capacity already, which last year we didn't have. But the process of releasing products is very similar. This year, it would have helped to have the release date earlier so we can do preproduction, what it didn't happen as mentioned. For the technology changes, we see a few certainly changes coming also from our [indiscernible] from the year 2020 onwards, and we do this in all directions whether it's Time-of-flight, Structured Light. We have a very strong innovation pipeline within the company, and we're looking also for a specific solutions towards Android camp and this includes software, which we don't do for the other side.

[Lee John Simpson, Analyst]

Great. And just for clarity if I could. So the installation time -- or the qualification time, not installation time on new tools is round about 3 to 6 months. So effectively Q1 is the set up for Q3 and Q2, likewise, a set-up, at least capacity-wise, for Q4. So the margin peak is Q4 on a fully loaded facility and that Q3 is a transition of let's say of 40% plus gross margin story. Do we think that's doable at this stage?

[Alexander Everke]

I think I mentioned this before, we don't guide that. And it depends on how the ramp up pans out.

[Operator]

The next question comes from David O'Connor, Exane BNP Paribas.

[David O'Connor, Analyst of IT Hardware and Semiconductors]

A couple from my side, maybe follow-ups from previous ones and just following up may be from Lee's questions there last. Michael, what gives you the confidence that the ramp up is earlier this year versus 2017. You mentioned that previously when you seem to be running later than your initial production plan? That's my first question. And then the second question for Alex, looking at the Q -- going back to the Q2 guide again and again, there're a couple of questions I'm going to ask, but it stops -- it's so weak it suggests that there is weakness across not just the 3D sensing, which program, which I think we all understand, but other programs as well. Just wondering, what's the risk that this softness continues into Q3 on the other programs? And then maybe a last question, if I can sneak one more in. You talk about the intra year ramp up seasonality more balanced from 2019 onwards, but what gives you confidence to be able to project this, even though you're broadening your base, which your #1 customer is still growing faster than this, any color on these questions would be helpful.

[Alexander Everke]

Okay. Alex here. So on the ramp, your first question, maybe we should phrase it differently, the ramp -- not that the ramp is earlier this year, it's not as late as last year. So if you remember last year, it was a bit later than normally. And I think this year, its, as in previous years, so it's coming on time. That's -- I would say it that way, simply for the fact the technology is already in the second generation so a lot of issues has been resolved in the complete value chain. So that's why I would say this year it's, as in previous years, last year was a bit later. Weakness in Q3, you mentioned. So based on the forecast from our customers, based on discussions we have, we are confident in Q3. And I think this is also different because you're talking now from one generation to other and it's not the same generation for the next quarter. So I think there's a difference of Q2 and Q3 because Q3 is a new generation. And for 2019, your question, whether based on what we see in the market base, what we have in the pipeline, we expect that we deliver on our mid-term guidance based on all information we have available today.

[Operator]

The next question comes from [ Alan Pond ] from [ Prudence ]. We will go and take the next question, which comes from Robin Brass from Hauck & Aufhäuser.

[Robin Brass, Equity Analyst]

I have one follow-up also on the Android customer designs currently. Is it fair to assume again that this is for 2019 given that it's almost May now in 2018? And secondly, a part of this question is, also looking at the CapEx for this year, in case you have further design wins, I would say would that also need more CapEx investments? Or how is your current plan here?

[Alexander Everke]

Yes, let me take -- Alex here, the first question. Yes, as stated last quarter, we clearly see that meaningful ramp for the Android business will happen in 2019. Just to mention that we see a small -- the beginning of a ramp in 2018 already for one program we have, but a meaningful ramp we see for 2019 only. And the reason is very simple, it's a highly complex system. It's not easy to incorporate this in the phone if you don't have long-term experience there. It's a very natural thing that it will happen only next year. And we have this opinion since quite a while. And it shows every day is prudent.

[Michael Wachsler-Markowitsch]

And let me take your question with regard to CapEx. What we currently believe is, based on what we see in the market and from our customers and developments we're going to have, and Alex mentioned our progress with the VCSEL manufacturing, we see a significant decline of our CapEx needs in 2019. Obviously not knowing yet what we would need to prepare for in 2020 or '21 ramp up, which we, maybe, have in the pipeline now, but which are not concluded on yet. So what we currently have in the forecast and what we currently see will be a significantly lower CapEx in 2019.

[Operator]

The next question comes from Douglas Smith, Agency Partners.

[Douglas P.E. Smith, Research Analyst]

I was wondering if you could talk a little bit about the competitive environment in 3D sensing. How you see potential competitors emerging and the potential for large OEMs requiring to dual source some of the technologies?

[Alexander Everke]

Yes. That's a great question. So we see the similar competitors as we have seen last year. We feel extremely confident and comfortable with our positioning because we have, for obvious reasons, the broadest portfolio that goes most deep into the value chain, and also understands and are able to supply the complete system including software. And this is a very, very competitive position we have there. And I mentioned before in the call that we have a very strong IP pipeline, especially in the 3D sensing area, and this helps us to, I would say, to accelerate our situation and competitiveness over time. And your second question, can you repeat that one?

[Douglas P.E. Smith, Research Analyst]

The possibility that large OEMs may necessarily require dual sourcing for some of their critical OEM technologies.

[Alexander Everke]

Yes. I mean, every customer has the desire to have dual sourcing at a certain period of time. But I can tell you in this situation, customers will be happy to have a complete and functional solution in their phones. And then over time, of course, they are looking. But this is our strategy that we continue to innovate, to offer the most differentiating products and solutions just to make sure that there are less and less dual source as possible. You can never exclude it, but I think our position is very strong there.

[Operator]

The next question comes from [ Horst Tim Berger, Conrad Invest ]. The next question comes from Vikram Kumar from Kuvari Partners.

[Vikram Kumar]

I'm just a bit confused, given what you said about not yet being clear on the spec and content value with this redesign for H2 this year and given though you're having active discussions with the Android customer base but we're not yet clear what comes through in contract and therefore ramp. How is it that we formulated and then restated our 2019 revenue number given that uncertainty in some of those parameters?

[Alexander Everke]

Well, for the ramp for this year and then what we predict, of course, for next year, this is a standard procedure. This is no difference to last year or the years before. So this is not something special. The only thing what we mention is the preproduction where we planned to do so, but because of release, this is not possible. But in the systematics and the structure of defining specs, agreeing on commercial agreements, getting forecasts, getting orders is exactly the same. So there is no difference.

[Vikram Kumar]

Sorry, you've got to speak clearly. Before I come to the Android, on this specific one larger in customer, unless I misunderstood something, we don't actually know yet what the H2 content spec will be in this reformulation. Therefore, we don't know what that will look like in 2019 either. Is that not correct?

[Alexander Everke]

So we know exactly what the customer requests. We know the spec. That's why our development is done according to the spec of the customer. The question is the release date when the product is released for production. That we need. So if you don't know it, you cannot develop a product. So this is all exactly the same as the years before.

[Vikram Kumar]

Okay. So you have a view on your -- I thought you said earlier that you felt that ASP will be up, but you're still in discussions. But what you're saying now is that the volume ramp and timing you don't know release, but you do -- you internally do know what your content will be in this reformulation, both for H2 and therefore likely in 2019 with this large customer? Is that true?

[Alexander Everke]

Yes. We know the spec, we know the product and all the rest is being finalized. Again same like last year. No difference.

[Vikram Kumar]

Okay, that's great. And on the second part of my question with -- what have you seen for other customers in your 2019 guidance, please remind me, Android customers, et cetera?

[Alexander Everke]

Well, as mentioned, we have publicly announced 1 big design win, and we are in process -- in discussion with large OEMs for further design wins, but they will be realized in the year 2019 and not 2018. So this is relevant for our 2019 year and guidance.

[Vikram Kumar]

Okay, so it does require some further wins beyond the large customer, beyond the one design win you've announced. It -- you are assuming some further wins that ramp in 2019 to get to your $2.2 billion target?

[Alexander Everke]

We do have a very broad pipeline and this is again same as the years before, you have a broad pipeline of opportunities, very specific discussions with customers and then month-by-month or quarter-by-quarter official designs happen and then you do the ramp planning and forecasting discussion.

[Moritz M. Gmeiner, Senior Director of Investor Relations]

Ladies and gentlemen, this concludes our question-and-answer session for today. We thank you very much for joining us this morning, and we look forward to speaking to you again with our next set of results. Thank you very much, and have a good day.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.