ams OSRAM AG

SIX:AMS

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to ams Third Quarter Year 2018 Results Conference Call. I am Alice, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. [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 to this morning's conference call on the third quarter results. As usual, Alex will lead you through developments in our business and Michael will give you some more details on our financials. Alex, please?

[Alexander Everke]

Thank you, Moritz. Good morning, ladies and gentlemen. I'm very happy to welcome you to our third quarter 2018 conference call this morning. Let me first give you some key financial figures. Michael will later take us through the financials in detail. Our third quarter revenues came in at $480 million in the upper 1/3 of our guidance range and up 57% compared to the third quarter last year. Our adjusted EBIT, excluding acquisition-based and share-based compensation cost, for the third quarter was $60.2 million or an EBIT margin of 13% of revenues, which was well in line with our previous guidance.Our business showed a strong performance in third quarter, driven by the previously expected significant product ramps in our consumer business and positive growth contributions from our other end markets. Let me take a look at our consumer business first. As the leader in optical sensing, we offer an unmatched portfolio covering high-performance solutions for our 3D sensing, including VCSEL-based illumination, TrueColor and other high-quality display management, spectral sensing, advance proximity sensing and other optical applications. Leveraging our extensive technology base, we are a key innovator in optical technologies and continue to advance high-performance optical sensing. We are a leading provider of 3D sensing technology, as shown by a large-scale ramp we are realizing this second half for a major global smartphone platform. We are ramping very high volumes of differentiated optical systems comprising complex optical manufacturing and high-performance wafer-level optics. As expected and consistently mentioned by us, the smartphone market has experienced multiyear development and expiration cycles for 3D sensing, which are due to the complexity of the technology. However, this has not changed that we are seeing across smartphone OEMs and ecosystem players, namely a clear focus on 3D sensing as they target broad usage of 3D technology through the coming years.We're in a strong position to support current and upcoming 3D sensing implementations across different technologies in 2018, 2019 and beyond while 3D sensing momentum continues to increase. We see an ongoing coexistence of 3D sensing approaches, structured light, time-of-flight and active stereo vision and are successful in all 3 areas. Through our leading portfolio of 3D technologies, solutions and system know-how, we address both face-related and world-facing applications and are engaged in numerous OEM projects and discussions at various stages.Here, I'm happy to add that we are involved in current design activities for world-facing 3D sensing application for a major smartphone OEM. The announced Android 3D sensing design wins for Chinese smartphone vendor, Xiaomi, where we cover VCSEL arrays, flat emulation and proximity sensing, and a major Android OEM for an undisclosed scope have both moved to production.We are also excited about 2 design wins in Android time-of-flight 3D systems for 2 different Asian smartphone OEMs, which leverage our illumination and VCSEL expertise. Our active stereo vision developments with a major Android ecosystem player for reference solutions are progressing rapidly. And we see a high level of partner engagement here. We enable a high-quality implementation of active stereo vision, which will help bring 3D sensing to a wider range of Android devices. On this cooperation, we expect to provide further details in the current quarter. Let me also say that based on advanced OEM discussions, we expect the active stereo vision solution, built around ams technology, to be in first smartphones next year. I'm excited about our position in the VCSEL space as we see significant design momentum for our differentiated VCSEL portfolio in different 3D systems. We are more and more successful, given the competitive advantage of our high-power VCSEL technology and our 3D expertise. We, therefore, expect to build a strong market position in high-performance VCSELs for consumer 3D sensing with a range of customers. This is based on our broad market traction with multiple 3D programs won or in advanced discussion.Our success underlines the strength of our 3D illumination portfolio, including dot projection, different types of flood illumination, proximity sensing and pattern projection. These developments and wins across different 3D technologies and customers clearly confirm our view that VCSELs are the illumination technology of choice in 3D sensing versus other technologies that have been discussed.Additionally, we have first computing OEMs engaging with us on 3D face recognition applications in the mobile computing space. All in all, it's exciting to see that extensive OEM and ecosystem player engagements and design activities across 3D technologies. These developments confirm the ongoing momentum in consumer 3D sensing adoption despite the emergence of different time lines in the market. We are also ramping TrueColor optical sensing solutions for display management in very high volume through the second half of this year. Moreover, we have secured first design wins for behind-OLED-display proximity and light sensing at a major Asian smartphone OEM. This is advanced new technology, which moves the sensing behind the display and enables bezel-less phone designs. We continue focused development efforts for new optical sensing applications while first spectral sensing shipments are expected to start as previously indicated and then contribute to our 2019 growth. Our audio sensing business continued to show a robust performance in the third quarter and offers an attractive growth outlook while our other consumer product lines provided attractive contributions from high shipment rates.Let me now move to the other side of the business, where our industrial, medical and automotive markets contributed positively to our overall development. Our industrial business showed a good performance based on ongoing solid demand in automation, HABA, industrial sensing and industrial imaging. As a key provider of sensing solutions to leading industrial OEMs, we benefit from increasing sensor deployment in this area.In industrial imaging, our industry-leading global shutter portfolio is gaining further high-value wins, like a first design win for our 50-megabit high-performance sensors solution at a U.S. customer. As an innovation driver, we see our imaging business offering very attractive growth prospectives for the coming years. I'm excited to add that we have gained an industrial VCSEL win with an online shopping leader for warehousing and distribution robotics. It is also a great example of how we are able to bring multiple products and technologies into a customer, driving broad engagement. Together with our previously announced automotive win, this success clearly shows how strong our technology end-market access is and how VCSEL will cover broad applications across end markets.Our medical business recorded another attractive quarter with good volumes from computer technology, digital X-ray, mammography and miniature camera endoscopy. We leverage imaging and optical technologies for high-quality diagnostics and innovation and see very good market traction in endoscopy, where our solutions enable new disposable products.Our automotive business continues to perform well and recorded healthy results in the quarter while we see ongoing attractive demand for our solutions. As we pursue significant development efforts for the reported major program win in VCSEL illumination for solid-state LIDAR, industry interest in our automotive technologies continue to broaden, particularly in Asia and in Japan. This is driven by our differentiated portfolio and strong know-how in new and upcoming applications, such as 3D sensing and LIDAR.I am excited to see very positive feedback from our LIDAR space on our VCSEL/driver IC solutions and optical path capabilities, where we offer outstanding optical performance in different LIDAR implementations. Additional industry players are, therefore, starting to engage with us in LIDAR and 3D sensing. We see, for example, interesting momentum in Japan with first trials at major automotive players. At the same time, design activities for the first in-cabin 3D sensing project are progressing for a leading OEM.To support our range of production needs, we implemented additional manufacturing investments into our Singapore facilities in the quarter, which included equipment for our internal VCSEL production line. The construction of internal VCSEL capacity for consumer applications is progressing to plan with the production ramp scheduled to start around middle of next year.Let me now update you on our strategic assessment. We have, on the one hand, evaluated a meaningful acquisition opportunity over the last months but have decided not to pursue this opportunity for a number of business reasons. On the other hand and looking further ahead, we see that optical sensing technologies will support an even broader spectrum of applications with significant growth potential for ams. This will also include areas such as audio sensing. At the same time, we recognize that upcoming optical sensing opportunities offer a larger-size revenue opportunity and higher growth prospects for us when compared to certain envisaged environmental sensing applications. We have, therefore, decided to deemphasize current efforts in environmental sensing and focus strongly on very attractive mid- and long-term growth opportunities in optical technologies. This includes new areas of optical technology innovation in the non-classic optical space, such as photonic elements and photoacoustic structures. Photonic elements comprise different types of micro and nano structures, creating components in integrated devices that are able to manipulate light in new ways. These structures enable innovative optical functionalities for sensing applications, which may span the range from manufacturing to environmental monitoring, health care and lighting. The technologies involve cutting-edge use of lasers, optics, electro-optical devices, such as new types of waveguides, lenses and effective elements for which we plan to leverage proprietary ams-type processes. We are now in the process of defining steps to implement the above-mentioned change and shift resources and expect further details to be available with the next quarter results.With these decisions, we have made ams even more focused in a strategic approach as we pursue our growth strategy around the 3 pillars: optical, imaging and audio sensing. We see a clear long-term technology trend towards optical sensing and optical technologies, where optical technologies will offer more attractive solutions for an increasing range of applications across different sensing markets. Consequently, we are focusing ams on this trend now to create an early lead in this exciting space. We will, therefore, emphasize development efforts for next-generation optical technologies to drive innovation as the leader in optical sensing.Supporting this move, we are also in early preparation stages for the planned secondary listing at the Hong Kong Stock Exchange, which is currently expected for the second quarter 2019. Besides enabling full access to the broad regional investor base, the envisaged listing also underscores the growing relevance of the Asia Pacific region for our business. To enhance the benefits of the transaction, we currently expect to include a share placement of up to 10% of outstanding shares in the listing transaction, subject to required approvals.Let me now come to the outlook for our business. For the fourth quarter 2018, we see further sequential growth as we continue to ramp very high-volume smartphone sensing products while our other end markets continue their positive contribution. Based on available information, we expect fourth quarter revenues of $470 million (sic) [ $570 million ] to $610 million, growing around 23% at the midpoint sequentially. Consequently, we expect 2018 to be another strong growth year for ams with record revenues and a top line growth of up to 44%. The adjusted operating margin for the fourth quarter, excluding acquisition-based and share-based compensation cost, is expected to increase further sequentially to 16% to 20%, taking into account product mix effects as overall demand is skewed to a mix including certain higher maturity products. At the same time, we expect total capital expenditures for 2018 of around $500 million. We anticipate strong cash generation in the fourth quarter and expect a meaningful positive free cash flow result for the total second half of 2018. We reiterate our revenue growth target of 60% CAGR for the 2016 to 2019 periods based on our business outlook and pipeline for the coming year, which translates into further substantial expected growth for 2019. We remain committed to driving profitable growth and endorse our target of 30% adjusted EBIT margin in 2020 as we are convinced of the long-term strength of our business and our strategic positioning in multiple growth markets. Following extensive investments in 2017 and 2018 and supporting our cash profile, we currently expect capital expenditure for 2019 to decrease significantly from this year's level and reach our long-term target range of 10% to 15% of revenues.Let me add that while we do not guide out further than the fourth quarter, we see early indications pointing to revenue seasonality for the first quarter versus fourth quarter being better, that is less pronounced than what we saw in the first quarter 2018. Given very good growth in our Android optical sensing business, this could support a first quarter on a similar or better level than the third quarter we just reported. Moreover, given the broader business growth we expected for next year, we currently believe that the seasonality within next year's first half will not repeat a pattern like this year's but offer an overall better picture. With this, let me hand over to Michael for details on the financials.

[Michael Wachsler-Markowitsch]

Thank you, Alex. Good morning, ladies and gentlemen. It's my pleasure to give an overview of our IFRS and adjusted consolidated numbers for the third quarter 2018.As usual, let me start with our P&L and top line development. Alex already mentioned that our third quarter group revenues were $479.6 million, which was at the upper 1/3 of our previous guidance. We recorded a very healthy 57% year-on-year growth while we saw exceptional strong increase of 92% compared to the previous quarter. Our adjusted gross margin, excluding acquisition-related and share-based compensation costs, was 33% compared to 41% in Q3 last year. This gross margin development reflects our product mix and the ramp-up nature of the quarter as we realized increasing run rates for high-volume optical products. Our IFRS reported gross margin was 31% compared to 37% in Q3 last year.Our R&D spending was $68.1 million the third quarter 2018, an increase from $63.6 million in Q3 last year. Despite a certain absolute increase, this means 14% of revenues in relative terms, which is significantly below last year's Q3 level of 21% of revenues. While there are always quarter-to-quarter movements in R&D spending, we expect a somewhat higher level of spending for Q4 in absolute terms, given our focus on R&D to drive innovation and focus on new product developments going into 2019.We expect continued meaningful levels of R&D spending going forward, which include a range of platform developments and large product opportunities we are working on. We're moving towards our long-term target for R&D spending, which is to stay well below 15% of revenues, helped by business growth we target for the coming years.Further down our P&L, SG&A costs were $42.7 million compared to $40 million in the third quarter last year. In relative terms, we spent 9% of the revenues on SG&A in the quarter, which is very nicely below the level in last year's Q3, with 13% of revenues. Here, we expect a roughly similar level of spending in absolute terms for the fourth quarter. Looking forward, we see ourselves on our way towards our long-term target for SG&A costs of well below 10% of revenues on a full year basis.Our other operating income of $2.2 million for the third quarter compared to $3.2 million in Q3 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.Given these developments, our adjusted operating result or EBIT, excluding acquisition-related and share-based compensation costs, for the third quarter was $60.2 million or 13% of revenues, which was well in line with our previous guidance. This Q3 result also increased as expected in absolute terms from $40.5 million or 13% of revenues in Q3 last year. The IFRS reported results from operations or EBIT for the third quarter was $37.3 million or 8% of revenues, up from $12.3 million in the same period 2017.Our net financial result was strongly positive at plus $34.8 million, showing again a very significant influence from changes in the valuation of the option element of our foreign currency convertible bond, which we recorded as required by IFRS rules. This figure compares to $6.1 million in Q3 last year. The financial result also reflects noncash valuation adjustments of foreign currency balance sheet items and, of course, interest expenses.The adjusted net result for the third quarter came in at $18.6 million compared to $23.5 million in the same period last year. This was mainly driven by higher interest expenses, while the mentioned change in valuation of the option element of the convertible bond is excluded in the adjusted net result. Adjusted basic and diluted earnings per share were CHF 0.22 and CHF 0.21 compared to CHF 0.28 and CHF 0.27 in Q3 2017 or USD 0.23, USD 0.22 compared to USD 0.28 and USD 0.27 for the third quarter 2017. Our backlog on September 30, 2018, stood at $602 million, up from $544 million we showed at the end of the second quarter 2018 and well above the $512 million on 30th of September 2017.And I would like to give some additional figures from the balance sheet and the cash flow statement to complete the picture. Our cash and cash equivalents stood at $378 million at the end of the quarter compared to $244 million at the end of the second quarter. This results from the utilization of certain committed lines to finance remaining CapEx needs and boost flexibility as well as healthy operating cash flow.Our trade receivables stood at $345 million, up from $290 million at the end of the second quarter, given the growth of our business. However, our DSO ratio was 69 days, down from 80 days in the last quarter but up from 48 days in Q3 last year. We are already seeing a solid decrease in DSO on a sequential basis, which we expect to improve further going forward.Inventories were $341 million compared to $333 million at the end of the second quarter. Given major ramp-up activities we are currently implementing, this development mainly resulted from changes in work in progress levels in our manufacturing while the finished goods portion of our inventory remained at roughly 25%.On the liabilities side, we have a current debt position of $247.3 million. But our long-term debt stood at $1,738 million at the end of September. Our net debt position was $1,606 million at the end of Q3, reflecting the convertible bond issued last year and this year. Our long-term debt was generally taken on to bolster liquidities, support CapEx and past acquisitions and create flexibility. Apart from the issued convertible bonds, the debt mainly consists of unsecured bank loans of a long-term nature. The maturity range on the debt is mostly centered around the 2022 and 2023 time frame. As I've learned about some unfounded speculation, I would like to clarify that we have not had any requirements for repayments on our debt over the course of this year.Our operating cash flow in the third quarter showed a very healthy increase to almost $86 million from minus $37.6 million in the same quarter last year. This positive development was mainly driven by our strong positive result as well as changes in trade and other payables. We expect strong cash generation in the fourth quarter, which will also drive a very meaningful positive free cash flow for Q4 and the full second half of 2018. As a result, we see our net debt-to-EBITDA ratio already improving by year-end from the current level.Looking at our operations. We are successfully realizing the current high-volume production ramps in 3D, optical and other sensing as shown by the strong revenue growth in the quarter. Production yields for certain customer products are ahead of expectations due to stronger efficiency improvements while significant advances in the filter deposition process for optical sensing products have substantially reduced processing times. This is driving a lower utilization of our expanded optical manufacturing and filter deposition capacity despite the ongoing ramp activities. Following further analysis, we have decided to retain these existing production capacities to support our future growth plans.In relation to our production, we recorded further CapEx investments in the third quarter of $106 million. However, this spending was well below last year's level of $168 million in Q3. This CapEx comprised planned investments, including further investments for our internal VCSEL production line in Singapore. As mentioned by Alex, we expect 2018 CapEx now to be lower than before and reach around $500 million for full year 2018. For next year, we currently expect CapEx to decrease significantly from this year's level, following extensive investments in 2017 and 2018 and to reach our longer-term target range of 10% to 15% of revenues.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 the line of Andrew Gardiner from Barclays.

[Andrew Michael Gardiner, Director]

I was just interested in trying to focus in on 2018 to start with. If we go back to earlier this year, you guys called for a very strong sequential half-on-half growth in 2H '18 versus 1H '18. In February, you were suggesting it could be on the order of 80% to 90% half-on-half growth. Now since then second quarter was obviously weaker and now we understand the product transition at Apple. And that set an easier first half base for you. And yet now with the 3Q results and the 4Q guidance you've given, we are somewhere in the high 50% range half-on-half, still healthy but clearly less than what you were anticipating earlier in the year. Now I know the end market may be a little bit slower, Android adoption may be a little bit slower, but those weren't really included as major assumptions in your guidance. It was always more about adoption and content and price. And we're clearly seeing adoption up, which should lead customer and content up. So can you just help us sort of bridge the gap between what has changed? And I think the easy conclusion here is that you face more price and margin pressure than anticipated. But what else is moving around that could be leading to these lower expectations?

[Michael Wachsler-Markowitsch]

This is Michael. Well, clearly as mentioned by Alex, it's related to the product mix and what we currently see is what it is. So we're excited about the broad adoption we see for our products. But the product mix within the portfolio makes the difference.

[Andrew Michael Gardiner, Director]

But what about the mix has changed since the beginning of the year that would lead to such a significant difference in revenue and profit?

[Michael Wachsler-Markowitsch]

Well, obviously we cannot -- as you know, we cannot discuss certain customers and details within these customers. But as I said, it's clearly the product mix.

[Andrew Michael Gardiner, Director]

Okay, all right. Perhaps just another one then, on the point you were making towards the end there, Michael, about the utilization on some of the lines and the filter deposition also improving. So you've got more sort of excess capacity or underutilization than you thought. Can you explain the future revenue drivers that are going to get that utilization up and therefore, lead to more attractive margin over time? Is it development in the Android ecosystem for wafer-level optics in 3D sensing? Or is it optical packaging more broadly? Just understanding how that's going to ramp would be helpful.

[Alexander Everke]

Yes, Alex here. So it's a combination basically of all what you have said, of course, to have a broader adoption with our optical packages, manufacturing in Singapore for a broader customer base and certainly a strong driver for that. You see in the Android business, we are just winning basically on a monthly basis. So the combination of both will drive utilization up. And that's also the reason why we have decided to keep tools which are underutilized today for our future growth. And for that reason, we expect also significantly lower CapEx spend for 2019.

[Operator]

The next question comes from the line of Achal Sultania from Crédit Suisse.

[Achal Sultania, Director]

Just a follow-up on the previous question. So just when we look at the margin guidance for Q4, it seems your revenues are still growing year-on-year almost about 10%, but your EBIT is down a lot versus last year. So are you saying that all of that is just a mix issue within one particular customer? Or are there other moving parts beyond that as well?

[Michael Wachsler-Markowitsch]

Yes, this is Michael. As I said previously, it's product mix effects across several large revenue streams in consumer, in 3D, display management, audio, et cetera. And this is -- and also across customers obviously. And this is influencing the margin. As you know, we cannot comment on specific products or customers. And we're not guiding for gross margins specifically. But we can definitely assume to see an improvement going forward from third quarter.

[Achal Sultania, Director]

And so when we talk about improvement, let's say, going into 2019, like do you expect mix to improve or you expect that because there would be more growth coming from more customers that the mix improves overall or you think that the mix within that one particular customer actually improves a lot next year?

[Michael Wachsler-Markowitsch]

Yes, I mean, clearly again, it has to do with the product mix. And as Alex mentioned, we see ramp-ups next year for Android customers. And we also see with these programs and revenue streams improve the margin profile.

[Operator]

The next question comes from the line of Sandeep Deshpande, JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

My questions are -- I have 2 or 3 small questions. Firstly, my question is on the world-facing sensor, you've announced a world-facing win. What are you going to be supplying in a world-facing 3D sensor? Secondly, in terms of your strategic changes that you are making, with the strategic changes that you are making, will it result in a reduction in your operating expenses because one of the pillars is being removed? And thirdly, regarding again -- back again to the question of your operating margin. I mean, you have given this 30% margin guidance in 2020. Why are you not taking away this guidance at this point, given that the guidance into Q4 and, of course, 2018 has disappointed significantly? Because it has only potential to inflate expectations into 2019.

[Alexander Everke]

So to your question on world-facing, we are, as I mentioned, in progress for an active project. It's not a win yet, but we are very close in getting there. That's the first world-facing activities we have as a company with a leading company -- customer. The contents, we can't disclose. But it's similar to front-facing that for every project, we look what makes sense for us as a company, which projects and part of the complete solution we want to provide. On the strategic changes, I mean, the key driver for this change was the understanding that the optical competency is where we are clearly leading as a company is very relevant for obvious reasons, for optical, for imaging but also for audio sensing. That's why we made this change to deemphasize our environmental business because we didn't see the growth we have seen before. The rationale for that was not to reduce OpEx significantly. It was to utilize resources, competencies and investments into the optical space to accelerate the growth there for the next years to come. We intend to keep our OpEx on a very reasonable level but to move predominantly resources from this business line and business segment into the optical space.

[Michael Wachsler-Markowitsch]

Let me take your question on the margin target. Clearly, we continue to see the potential for a strong improvement over time. We have areas within the company where we're already significantly above this target even. So this is a push certainly, but we expect to get there. And why should we take it away then?

[Operator]

The next question comes from the line of David Mulholland from UBS.

[David Terence Mulholland, Director and Equity Research Analyst]

Just one short-term question, the gross margin again. But I'm struggling to follow in terms of how you ended up with higher yields, which should have been a positive for gross margins. And I can't understand there ending up being some underutilization. But can you walk us through how that doesn't end up netting out at the same place in how you've ended up with a kind of net impact from that? If possible, I've got a couple more questions.

[Michael Wachsler-Markowitsch]

Yes, it's Michael. Yes, I mean, as I said, it's product mix-related. We see a strong improvement in our yields, which takes aways some risk, which also will help us going forward to have lower CapEx. And we mentioned it before that we expect to be already within our long-term guidance of 10% to 15% of revenue. If you can remember, about a quarter or 2 quarters ago, I mentioned that we hope to get close to that range. Now we believe we get into that range, so clearly lower CapEx going forward. And the utilization topics have also a smaller influence going forward. On the other hand, and I mentioned it also in my words, we have a strong technology development seen. And therefore also because of less time we need, processing time, a more significant underutilization. So it's a mix of effects which led to what we currently see.

[David Terence Mulholland, Director and Equity Research Analyst]

And then just looking forward to next year, in 2019, two questions on that. Given what you've done in terms of the capacity spend or the CapEx investment you've already made in the last kind of 18 months, what do you already have and if you can quantify at all in terms of revenue capacity within your manufacturing facilities today? And then as we look towards your revenue target for 2019, the $2.7 billion, if I calculated it right, how much of that do you think is actually underpinned based on what you've already won from the contracts that you've been talking about?

[Michael Wachsler-Markowitsch]

Yes, again, Michael. The CapEx spending supports clearly the target for next year, I mean. And that's what we are targeting. And therefore, we'll stick to it.

[David Terence Mulholland, Director and Equity Research Analyst]

But you've already spent enough for that, as in you've already spent enough to have capacity for the 2019 target?

[Michael Wachsler-Markowitsch]

Yes. Plus the 2019 piece. But the 2019 piece obviously will also support years beyond.

[Alexander Everke]

And Alex here. And 2019 is, of course, as we mentioned, significantly lower than '17 and '18. And of course, we continue to invest in our wafer fab for VCSEL manufacturing. So there will be add-on investments but significantly lower. And all the investments we have done so far, these minor adjustments, supports the growth we indicated for 2019, mainly driven by all the high-volume products related to 3D sensing, display management and other -- also audio. And then of course, we mentioned today a lot of Android design wins. And obviously, we have more in the pipeline, which are all related to time-of-flight, active stereo vision. We see a strong momentum in display management, especially behind OLEDs. The perception of the market is very, very strong. And you will see that this kind of technology will go to multiple customers because it's a very differentiated technology. Spectral sensing, I mentioned already. And then of course, charging project, the power project we have indicated some quarters ago, drives really a strong growth for us in the future and, of course, continuous growth in the audio business as well as medical, automotive and industrial business.

[David Terence Mulholland, Director and Equity Research Analyst]

That's good. And then just one final question on the balance sheet. Obviously, Michael, you mentioned using some of the outstanding debt facilities you already have. Can you just comment on how much more capacity you have from the committed lines that you have if you needed to kind of increase your debt further? And just can you clarify, because you mentioned obviously the interest expense on that is fairly low and the time line is quite long, but are there any covenants on the debt that you have outstanding?

[Michael Wachsler-Markowitsch]

Yes. We still have ample lines available, if needed. But we currently see no need to pull further lines. We have a strong cash flow generation. We had already in Q3. We expect even substantially stronger in Q4. So I think that the level of debt peaked. And we'll take it from there and we'll improve going forward.

[David Terence Mulholland, Director and Equity Research Analyst]

And the covenants?

[Michael Wachsler-Markowitsch]

I don't want to comment on specific covenants. But there is nothing which worries me.

[Operator]

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

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

A couple from my side, I would say. Maybe firstly for Michael, going back to this underutilization. Can you -- firstly, will that extend into the seasonally weaker first half in 2019? I mean, can you actually give us a utilization number for what you expect in that transition from Q3 to Q4? And I have a follow-up.

[Michael Wachsler-Markowitsch]

Yes, it's Michael. I cannot give any specific utilization number. We have different lines. I mentioned the filter line, which is probably currently the line which is underutilized to the largest extent because of the rapid R&D development we have seen or the rapid progress in our developments, which require significantly reduced time on filter depositions. But as I said, we see improvements there. And clearly, it's always -- as usual, it depends on the demand pattern of our customers. And as Alex said also, we see -- we clearly see that the revenue seasonality for the first quarter versus the fourth quarter this year has been better, so less pronounced than we saw in the first quarter 2018. And we also expect to continue this into the second quarter.

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

Understood. And maybe a follow-up then, one for Alex, on the pricing pressure you're seeing for these older kind of optical products. Was that higher than you expected? If I remember back to the start of the year, you initially started speaking about ASP increase. And it seems you were kind of surprised slightly by the strength of that pricing pressure. And just to give us a sense of how we should model the ASP trend for these kind of older products going forward.

[Alexander Everke]

Yes. So I don't see a big difference to what we see regarding pricing pressure. The mix is, to more skewed, mature products. On the mid-term, we see that more new generations come up, as we indicated multiple times on our quarterly sessions. And this new technology coming up, you bring the ASP up further. But it always happened in the market. That's one of the other platform uses similar technologies for multiple generations.

[Operator]

The next question comes from the line of Robert Sanders, Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

First question is just on your VCSEL business. When you think about that business in smartphones, do you see that displacing sockets occupied by existing players? Or is it mainly about winning new sockets? And I have a follow-up.

[Alexander Everke]

I mean, when you look at the design wins we just announced, these are all new business. And actually, it was our portfolio, we're creating new applications together with our customers. That means we are winning new sockets. And that's the focus of the company, to win more sockets and new sockets.

[Robert Duncan Cobban Sanders, Director]

Got it. And just my follow-up would just be on the AMI business. There's been obviously a lot of chatter around slowdown in automotive, robotics sales, exports down for the last 3 months in Japan. Have you seen any impact from your large customers, like Conti and ABB, in that business as you look into Q4 and into the first half of next year?

[Alexander Everke]

No, we don't see any change of our customer demand in forecasting. So we don't see this. And the business we are creating right now, especially the new 3D sensing opportunities and LIDAR, this, as you know, is more for the next years to come.

[Operator]

The next question comes from the line of Michael Foeth, Bank Vontobel.

[Michael Foeth, Head of Industrials Team]

Two questions. One is regarding your fourth quarter revenue guidance. Maybe you can help us, the incremental revenues in Q4 versus Q3, how much of that is related to new products which did not materially impact the third quarter? Any indication there would be helpful. And the second question is why are you planning a placement or capital increase in Hong Kong when actually your CapEx requirements are lower than previously expected and you expect your cash flow to improve significantly going forward? So why is that needed?

[Alexander Everke]

Thanks for the question. So for the fourth quarter, I would say the minority is new products and new business ramping up. The majority is still business we had for a while. But certainly, we see for the first quarter, as we indicated, a lot of new, especially Android business will pick up. That's why we gave quite a positive outlook also for the first quarter really.

[Michael Wachsler-Markowitsch]

And on your second question, we see very clearly that there is significant interest coming out of Asia into ams. And that we have the ability to access a wider range, significantly wider range of investors and pools of investors than we currently can. And in that context, we want to optimize the effect from the secondary listing.

[Operator]

The next question comes from Janardan Menon, Liberum.

[Janardan Nedyam Menon, Technology Analyst]

I just want to confirm that you said that the major smartphone OEM, the world-facing 3D sensing application, that is still not yet won. That's just a design activity that you're doing for them, which hasn't yet been secured. I just want to confirm that you can still achieve your 60% revenue growth between 2016 and 2019 if you don't win that particular socket.

[Alexander Everke]

Yes, absolutely. And I gave in the question before all the details why I believe so. We also indicated last quarter that our guidance for 2019 or for the next full year of the 60% growth was not -- did not include world-facing design wins. So we're also very clear on that one. But we see a lot of progress going on there. And we are very excited and proud to be in the leading position there.

[Janardan Nedyam Menon, Technology Analyst]

So if I look at your next year sort of revenue profile, you said that you could do around your Q3 or higher revenue, which is, let's say, about $480 million. And if I sort of model that through, you would still need a very large jump into your Q3 and Q4 with revenues potentially going toward $700 million, $800 million in those quarters to achieve the 60% growth. So I see -- I mean, I heard what you said, which is you have a number of activities which is ramping up. But that sort of a jump would suggest that you need 1 or 2 really big wins to drive that. So do you have something of that nature already for the second half of next year? Or is it that you're seeing multiple wins which you'll drive that kind of sequential increase into the second half of next year versus the first half?

[Alexander Everke]

Yes, it's both. We have multiple wins, and I mentioned many of them already. And we do see this growth, as you have just described, absolutely.

[Janardan Nedyam Menon, Technology Analyst]

Okay. And then last, small follow-up from me. Which are the environmental sensors that you're dropping?

[Alexander Everke]

Environmental sensors, it's gas sensing, temperature, relative humidity and pressure.

[Janardan Nedyam Menon, Technology Analyst]

And all of them are being deemphasized?

[Alexander Everke]

Yes, it's a deemphasized. We still have the capability in the company. We see opportunities there. But related to investments and related to focus for the company, it's clearly deemphasized there.

[Operator]

The last question for today comes from Veysel Taze from ODDO.

[Veysel Taze, Analyst]

Most of them have been already addressed. But a few left, on the utilization topic you mentioned. Could you say what is the drag on the margin? So the underutilization, I mean, is it 200 basis points, 300 basis points? Any indication there and how that could progress into 2019 and 2020?

[Michael Wachsler-Markowitsch]

No, I cannot give any details there. It's mostly related to the product mix and technology developments of some of the products.

[Veysel Taze, Analyst]

Okay. And then on your CAGR, 60%, just as an add-on to the previous questions, so to say. I mean, you need to grow for 2019 60-plus, so to say, at this basis. So we know what is happening at your large customer, so you are not assuming here this world-facing part. So which would imply basically your Android business needs to go up very heavily at this stage. So I'm not sure, did you announce something new in Q4 apart from the 2 you had previously? So can you just update on the Android opportunity there, given also the discussions in the market that some people might delay as they are looking for below-display solutions for authentication, et cetera?

[Alexander Everke]

Like I mentioned before, the business we have and the outlook we have from all our customers, including design wins, which was communicated and obviously some others in the pipeline supports the growth for next year, absolutely.

[Veysel Taze, Analyst]

But for Q4, let's say -- or with Q3 earnings, you are still with the 2 design wins in the Android platform, right? So you did not announce something new?

[Alexander Everke]

We just announced a number of new design wins compared to last quarter's earnings release, we just did today.

[Veysel Taze, Analyst]

Related to the 3D sensing?

[Alexander Everke]

Yes, we mentioned, for example, 2 design wins in the time-of-flight as an example.

[Veysel Taze, Analyst]

Okay. Can you say on the environmental business how big this business is currently, a rough indication, so in terms of sales you have?

[Alexander Everke]

It's a smaller portion of the business, but we don't release exact numbers.

[Veysel Taze, Analyst]

Okay. And you wanted to sell this business, right? So it's...

[Alexander Everke]

What we have communicated is that we'll deemphasize the business. The path forward, we will most likely communicate in the quarter from now as we described today. But the decision today is to deemphasize the business. And most importantly, resources are moving from this business to the more promising optical area we're addressing.

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

Thank you very much for your questions. This concludes the question-and-answer session for today. And we thank you very much for joining us this morning, and look forward to speaking to you soon again. Thank you very much. Bye-bye.

[Operator]

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