ASM International NV

AEX:ASM

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's ASM International Q1 2019 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Victor Bareño. Please go ahead.

[Victor Bareño, Director of Investor Relations]

Thank you, Sarah. ASMI issued its first quarter 2019 results last evening at 6:00 Central European time. For those of you who have not yet seen the press release, it is accessible on our website, asm.com, along with our latest investor presentation. As always, we remind you that this conference call may contain information relating to ASM's future business and results in addition to historical information. For more information on risk factors related to such forward-looking statements, please refer to our company's press releases, reports and financial statements, which are available on our website.And with that, I'll turn the call over to Chuck del Prado, President and CEO of ASMI. Chuck?

[Charles Dean del Prado]

Thank you, Victor. And thanks to everyone for attending our first quarter 2019 results conference call and for your continued interest in the company.So let's first -- let's start with a review of our financial results. Revenue in the first quarter amounted to EUR 249 million, a strong increase of 56% compared to the first quarter of last year, and a slight decrease of 2% compared to the fourth quarter of 2018. Revenue in the quarter was a touch above the top end of our guidance, which was a range of between EUR 225 million and EUR 245 million. Service and spare sales increased by 34% compared to the first quarter of last year, and showed also a 2% decrease as compared to the fourth quarter. In terms of equipment sales, ALD was a strong driver in the quarter, but the contribution from the other product lines continue to be solid as well. [ Also note ], was the strong performance of Epi where we achieved record-high sales for the quarter, including multiple shipments of our Intrepid 2 and strong sales in the analog power segment. By industry segment, the revenue stream in the first quarter was led by Foundry, with sales up compared to the previous quarter. Foundry was followed by Logic. Combined Logic and Foundry sales we're at an all-time high in the first quarter. In memory, which was the third largest segment, sales remained at the relatively low level. Sales in the analog segment remained solid in the first quarter.Gross margin was 41.3% in the first quarter, slightly down from 41.7% in the fourth quarter, and up from 37.8% in the first quarter of last year. The slight decrease compared to the first quarter is mainly explained by mix effects. The gross margin still reflects the effect of investments in new products and new growth initiatives. SG&A expenses decreased slightly compared to Q4 and included the continued higher level of legal expenses. R&D expenses dropped by 15%, 1-5 percent, compared to the fourth quarter. In Q4, the higher level of R&D was caused by a couple of incidental items, as discussed in our previous call.Financing results in the first quarter, included the EUR 4 million currency translation gain compared to a translation loss of EUR 8 million in the year ago period. As a reminder, we keep the largest part of our cash balance in U.S. dollars, and translation differences are included in the financing result. Let's briefly look at ASMPT. Results from investments, which reflect our -- reflects our 25% share in the net earnings of ASMPT, amounted to EUR 3 million only in the first quarter, down from EUR 6 million in the fourth quarter, and down from EUR 16 million in the first quarter of last year and are reflecting a lower utilization. In the first quarter, ASMPT reported sales of USD 467 million, down 23% compared to Q4, and down 16% from Q1 last year. Bookings dropped to USD 460 million in the quarter, down 3% sequentially and down 30% year-on-year, reflecting the worsening conditions in the back-end market. Now turning back to ASMI's consolidated operations. ASMI's net earnings on a normalized basis amounted to EUR 53 million in the first quarter, up from EUR 46 million in the fourth quarter. Our new orders in the first quarter were EUR 235 million, down 22% from the fourth quarter, and up 14% year-on-year. As such, orders exceeded our guidance, which was a range of between EUR 200 million and EUR 220 million. As a reminder, the quarter-on-quarter comparison was impacted by the fact that our order intake in the fourth quarter was relatively high due to orders that have been pulled in from the first half of 2019 into 2Q -- Q4 of last year. Equipment orders in the first quarter were primarily driven by strong demand for our ALD tools. Looking at the breakdown and bookings by industry segment, Foundry represented the largest segment in the quarter. Foundry bookings increased compared to the fourth quarter, and we're at a record high for our company. Logic was the second largest segment, with bookings somewhat lower than in Q4, but still at a very healthy level. The combined Logic and Foundry segments accounted for clearly -- for the clear majority of our total orders. Memory represented the third largest segment, with bookings decreasing compared to the fourth quarter. Bookings were relatively low in both Memory segments. After strong levels in the previous quarters, bookings in the Analog segment meaningfully decreased in Q1.Looking at our balance sheet and cash flow. We ended the first quarter with the cash position of EUR 312 million, up from EUR 286 million at the end of December. Free cash flow amounted to EUR 21 million positive, which is driven by strong level of profitability, and partly offset by EUR 12 million cash outflow due to higher working capital.Regarding capital expenditures, as already discussed in earlier quarters, we expect that after the increase in 2018, our capital expenditures will remain at a higher level in 2019 due to the investments we are making in a new manufacturing facility in Singapore. Groundbreaking for this new facility, has recently started, and construction work is expected to be completed in the first half of next year of 2020. As already announced last quarter, we plan to raise the dividend this year by 25%, to EUR 1 per share and we intend to cancel 5 million treasury shares, which will reduce the issued share count by 9%. Both proposals will be up for a shareholder approval at our upcoming AGM on May 20.Let's now look in more detail at the trends in our markets. If we look at the WFE, our wafer fab equipment market in total, demand in the first part of 2019 has been trending significantly lower compared to the same period of 2018. Similar to the second half of last year, this is the balance of substantial weakening in memory market demands and a much stronger trend in logic/foundry spending. Looking at the memory segment, customers are currently digesting the substantial investments they made over the last few years and focus -- and are focused on rebalancing supply and demand in their markets. This is evidenced by the substantial cuts in CapEx in the memory sector this year. While visibility in the memory market is relatively limited, we do not anticipate a material recovery in spending in the broader memory market in the second half of 2019 as compared to the first half.For the full year 2019, memory spending is still expected to be down significantly, most of the spending in memory will be on technology transitions. Our strategic focus in the memory segments remains the expansion of our served available market. Over the last few years, we have invested in broadening our portfolio of ALD applications for future DRAM and 3D NAND device technology. As customers transition over time to next node and generations, we expect to increase our SAM, our served available market, step-by-step over the next few years. For ASM, the year-on-year drop in memory sales in the first quarter was more than offset by Logic and Foundry customers, who stepped up spending on the advanced nodes. In advanced Logic, demand remains strong. Spending is now focused on capacity expansion for the 10-nanometer node and initial R&D investment for 7-nanometer. As highlighted on earlier occasions, the transition to the 10-nanometer node in advanced Logic is a strong inflection point for us, for our company, and has driven a substantial increase in the number of ALD layers as compared to the 14-nanometer node. In Foundry, we have experienced strong demand, primarily related to the first round of 5-nanometer investments. Compared to the previous node, we believe we have successfully expanded our position in 5-nanometer in both new and existing ALD applications. And as a consequence, strongly increased our share of wallet in leading Foundry. In addition, we have also increased our position in epitaxy with the leading Foundry customer in that transition from 7- to 5-nanometer. We expect spending in the combined Logic/Foundry segments to remain solid in the first half of this year. Taking a longer-term view, Logic and Foundry will remain strong segments in the overall single-wafer ALD market in the next years. As ALD is expected to remain a key enabler of further miniaturization, new device architectures and new materials that are only road map of our Logic/Foundry customers. Last but not least, looking at the analog segment while this segment is clearly smaller than Logic or Foundry, we again achieved a strong sales in analog in the first quarter. As discussed last quarter, we anticipate that demand in the analog segment will be lower in the second half of 2019, following healthy levels in the second half of last year and in the first half of this year.To summarize the market trends, while memory demand is trending significantly lower this year. ASM is strongly benefiting from advanced node spending in the Logic and Foundry segments. As already highlighted in the last few quarters, Logic and Foundry account for the largest part of our business. In addition, we have achieved a much bigger share of wallet with our Logic and Foundry customers in their most advanced nodes, as we are engaged in the substantially higher number of layers. This is driving our strong current performance.In terms of product lines, while ALD continues to be a strong driver for our company, another pillar of our growth strategy is to aim for structurally higher sales in the other product lines. In epitaxy, we believe our market share has clearly increased over the last 2 years on the back of our first penetration in the advanced CMOS segment and a healthy contribution at the same time from analog and power. We remain strongly focused on further increasing our share by broadening our engagements in the advanced CMOS markets. In the other product lines, in PECVD and in vertical furnaces, we are making targeted investments to enhance also our niche positions in these markets in the coming years.Looking at the full year, average expectations for WFE spendings still show a year-on-year decrease of mid- to high-teens percentage in 2019. Views are unchanged that this will be the balance of a substantial decline in memory spending, while spending in Logic/Foundry is expected to increase in 2019 supported by solid demand for the most advanced nodes.So now let's close this introduction with a short look at the guidance that we issued with our Q1 press release. For Q2, on a currency comparable level, we expect sales of -- between EUR 230 million and EUR 250 million, while bookings, on a currency comparable level, are expected to be in the range between EUR 240 million and EUR 260 million. For 2019, as a whole, general expectations are still that the wafer fab equipment market will decline with a mid- to high-teens percentage. Logic and Foundry, as compared to the memory segment, are expected to stay healthy in 2019. And based upon this current market view, we expect to meaningfully outperform the WFE market in 2019.At this point, Petrus van Bommel and myself are more than happy to answer any for questions that you may have.

[Victor Bareño, Director of Investor Relations]

[Operator Instructions] All right, Sarah. We are ready for the first question.

[Operator]

[Operator Instructions] And your first question comes from the line of Stephane Houri from ODDO.

[Stephane Houri, Research Analyst]

So I have indeed 2 questions. The first one is with the visibility that you have right now, what prevents you from giving a more precise guidance with the order book and that you have in the guidance to give for Q2? And the second question, you said you do not expect any recovery in memory for the second half. Do you mean that you don't bank on it in your guidance? Or you really don't see it coming? And if there is any difference between NAND manufacturer and DRAM manufacturer?

[Charles Dean del Prado]

Yes. So Stephane, thank you for your questions on the guidance for Q2. Yes. This is the way we always give guidance with small ranges as we can. And as you have seen, we have adjusted our guidance for Q2 upwards based on the most recent visibility compared to a few months ago. And that's the best we can do.Then your question was also what we took into account for memory in the second half. Well, we assumed for now, no, let's say, material recovery of, let's say, CapEx of serious investments by the key customers in the DRAM and the 3D NAND segment. So we did not assume any meaningful recovery now. And that's just based on the visibility with our customers today.

[Stephane Houri, Research Analyst]

And same thing for NAND manufacturer and DRAM manufacturer, don't you see any difference?

[Charles Dean del Prado]

For DRAM versus 3D NAND?

[Stephane Houri, Research Analyst]

Yes.

[Charles Dean del Prado]

Yes. No. We don't see a real difference. We have no indication in both segments. And on earlier calls, we gave an indication that we might see an earlier recovery in DRAM than in 3D NAND, and that is a possibility. We have not been able to gather any more visibility that's -- that would really confirm that. So for now, again, for both 3D NAND and DRAM, we don't foresee a recovery. But at the same time, it could be that for us specifically, and that's very customer specific that there is a slight improvement in memory spending in the second half compared to the first half. But that's more customer specific, project specific than it is an overall industry recovery.

[Operator]

And your next question comes from the line of Marc Hesselink from ING.

[Marc Hesselink, Research Analyst]

First of all, what is your visibility? So it's clearly strong technology transitions in Logic and Foundry. And what is your visibility on how that will phase over into the next technology transitions? Will there be like a gap period, where you beat the volume orders to fill it? Or will it be very close to each other going into next technology month?And second question is [ above earlier ] guidance revenue for both the first quarter and second quarter? Is that purely stronger demands or is there also may be a bit of a pull-in from the second half of the year?

[Charles Dean del Prado]

Okay. So first, on -- yes, basically, you're asking -- I read your question on Logic/Foundry, what is the overall climate in Logic/Foundry. I think in general in Logic/Foundry, of course, we also see very healthy spending in 2019. It may be the Logic/Foundry combined. It may be a little bit more weighted towards the first half than to the second half. But if that is the case, it's in a modest way more weighted to the first half, and then it likely would maybe be a little more visible in the bookings than in -- on the billing side. But we -- at this moment in time, we do not see any structural deterioration in that segment. So from that point of view, our visibility is that this segment will stay healthy in the second half. If your question is how do we expect Logic/Foundry to evolve into 2020? Of course, that's a little bit too early to comment on. The only thing we can say is that if you look at the 10-nanometer node in Logic, then it is a very strong node for us. Again, we have gained a lot of layers going from 14 to 10. And we, for now, assume that the ramping of 10-nanometer will not stop at end of this calendar year that there is more capacity for this segment to invest. How that's exactly, from a timing point of view, will evolve into next year? That's too early to tell. But we don't think that the 10-nanometer node will be saturated in terms of capacity by the end of the year. That's basically what we have learned so far based on today's visibility. And then the Foundry segment, 5-nanometer also a very strong node. Again from 7- to 5-nanometer, we gained significant amount of layers, which feeds the current strengths in our reporting. Also there, at the same time, this is their, as far as we understand, the initial capacity build by this leading Foundry customer. It will not stop there. But how it will develop immediately going into 2020? That's too early to tell. At the same time, we -- in terms of future nodes, we already are shipping tools for N7 Logic, R&D, and we are already shipping N3 tools for N3, R&D and Foundry segment. So those -- and if you look at the intensity of the R&D programs at the customers, it's hard for us to believe that it will take many years for that to turn into high volume. I think there is no reason to believe that there is more time in between nodes in Foundry than we have seen before. And it's not very likely that in Logic, going from 10 to 7 it will take as much time as it took to go from 14 to 10, I think that was more an anomaly in our perception so far. So I trust that, that answers your question, and we are very much looking forward to further increase our share of wallet as we go to the next node in both segments. And that's what we are working on today. And then the second...

[Marc Hesselink, Research Analyst]

I'm sorry the second part is that we -- yes, it was -- and I think you already answered a little bit with your -- which start of your -- most of it a pull-in of orders of billings in the first half of the year coming from the second half of the year.

[Charles Dean del Prado]

Yes. No. We don't -- that is not a major factor in what we reported today.

[Operator]

And your next question comes from the line of Nigel Van Putten from Kempen.

[Nigel Van Putten, Analyst]

First one on CMOS Epi, how many customers are you engaged with at the moment in a meaningful way? I mean it's clear as 1 Foundry customer that engaged with you? How are you sort of progressing with other customers?

[Charles Dean del Prado]

Well, we have, let's say, including our high-volume customer. We have, let's say, multiple engagements in -- where we are exchanging a lot of know-how, and we have, let's say, multiple customers where we have -- we have more than one customer where we have tools, and we have multiple engagements in general. So we really are focused to expand our Epi position beyond this first HVM customers, if that is what you would like to know. But it will take time for that to develop. But of course, it's great to have a solid reference now for already 2 technology nodes in leading Foundry.

[Nigel Van Putten, Analyst]

Maybe a follow-up because you mentioned epitaxy in -- as one of the key drivers for the quarter. Typically, you say, if I remember correctly, that ALD is the vast majority of revenue. This time you didn't. Is that -- for that reason that Epi is maybe as strong as ALD in the quarter?

[Charles Dean del Prado]

Well, yes, it's a good question. We have -- of course, ALD has been a very, very strong driver for multiple years, but as we shared with you for quite a number of quarters, it has been our strategic intention to really get more gross engines up to speed. And so we adjusted our strategy on multiple products accordingly 2, 3 years ago. And as a result of that, we have seen in 2018, all products basically grew year-on-year. And also this year, we trust that beyond that -- not only ALD, year-on-year, will contribute to growth. That is our aim. Again, it's not a guidance but that is our aim for the year that not only ALD will year-on-year grow. That is what we -- we'll try to achieve this year. And specifically on Epi, we can say that Epi grew from 2017 to 2018, and we intend to grow Epi also this year.

[Operator]

And your next question comes from the line of Robert Sanders from Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

My first question is just on your Logic -- U.S. Logic customer. And let's talk about their 10-nanometer process may not be actually very competitive from electrical point of view, and that they will only ramp in 1 site. Is that what you're assuming? Or in your planning, are you assuming that they will roll it out across their 3 main sites? And how will that affect you if that played out? My second question is just -- I don't know if the VLSI data has come out in terms of your market share, but I'd love to get an update on where you think your market share can go in ALD. And whether you're starting to benefit from being -- from the move -- potential move from batch tools to single-wafer? Is there any kind of change there with the quality requirements? And then the last question, which in the -- in your N3 Foundry development, are you seeing any sort of early work on nanowires get all around as a driver being utilized going forward?

[Charles Dean del Prado]

Okay. Rob, thanks for your questions. So first, Yes. The 3 versus 1 site, it's always -- we're not allowed to -- on these calls to speak about, let's say, manufacturing strategies of individual customers. So I am not allowed to answer this question directly. The only thing we can say, Rob, is that we see a tremendous -- yes, let's say, continuation and acceleration of demand in leading logic compared to, let's say, 2016, '17, early '18 as it started to develop in the second half of last year, and is continuing full speed in this year. So I trust that our customers are -- they're doing that with their eyes clearly -- there was -- they're doing that for a reason. So -- and so far, we only have indication that the end markets of leading logic are healthy enough for them to continue on this task, and that's the way we are serving them. And the visibility we have on their forecast has been pretty decent so far. And that's the only thing we can -- that we steer our organization on. So I don't want to get into further detail on specific customers, if you don't mind. Then secondly on market share, ALD. Yes. So market share, I understand that overnight, they also -- Gartner numbers came out. And I think Gartner estimated our ALD market share went down by about 4% compared to VLSI where it went down by 2.5% in 2018. While as you know, as we shared it based on -- triggered by questions by you or your colleagues on earlier calls, we are not surprised with these numbers, especially, if you look at the fact that in 2018, as always the market share development is determined by the mix between the industry segments. And as you know that the overriding drive in 2018 was still memory. And so that, in general, is less favorable to us than when it's more Logic/Foundry driven. And as you know, as of the second half of last year, Logic/Foundry took over, took over the lead. So we think as of that moment in time and also going into 2019, I think the developments in terms of industry dynamics are strongly in our favor. So we trust that. Yes. We expect our market share to improve -- to develop in a healthy way in 2019 based on the fact that memory spending is likely down significantly, while Logic/Foundry is expected to be much more robust throughout the year. And then, beyond that, Rob, as you know, as we shared before, we are aggressively in our R&D programs, working on further expanding our served available market, not only in Logic/Foundry, of which you've seen results in the recent technology, node changes, but also, in memory. We are very focused to gradually, step by step, in DRAM and 3D NAND to increase our exposure, to increase our served available market there, to -- and in that way, maintain leadership in the ALD space.Then on N3 Foundry, yes, let's put it this way that we are addressing in general in the Logic/Foundry space, we are very much aware of the current FinFET infrastructure, and the need of this segment in case they would like to transition to nanowires, whether that's in Logic or in Foundry. And all our -- many of our process developments and material developments -- not to forget material developments, are also focused on that potential transition. But as we see, that's likely not very near term, but we are already engaged. As you know, we are now engaged at least on programs set for -- our customers are 2 to 4 years out. Yes? And for some more fundamental items, we don't even look 5 to 6 years out. But most of our R&D is focused on 2 to 4 years out. And that also includes nanowire [ work ].

[Operator]

And your next question comes from the line of Quang Le from Crédit Suisse.

[Quang Tung Le, Research Analyst]

And I have a question regarding this 7- and 5-nanometer transition because they are believed to use EUV for its development, and there is this belief that EUV should reduce the [ position steps ]. However, you still see it increasing for your ALD. Could you please explain why that is the case?

[Charles Dean del Prado]

Okay. So since you just said 5-nanometer, I trust you're specifically talking to Foundry. And yes, well, what -- the only thing we can -- well, let's start with the bottom line first. It's clear that we are increasing our share of wallet in Foundry as we go from 7 to 5. I think the numbers speak for themselves that we are reporting today. So it's an indication that the net result of that node transitions is positive for ASM, yes? That's the bottom line answer to your question. So then to elaborate a little bit more of it. Of course, you likely are referring to how much exposure will EUV give to the multi-patterning part of the business. And there our answer has not changed in time that is that indeed some double patterning, some conventional double patterning layers will be replaced by EUV, yes. At the same time, the introduction of EUV will enable our customers to continue Moore's law. And that is, again, driving a strong overall increase in ALD demand as conventional deposition will run more and more out of steam. So in general, we are embracing the introduction of EUV. And so although some layers are going to be placed. It should be clear that multi-patterning will remain a steady basis for years to come. And so it will continue to contribute to the ALD market. But probably from a relative point of view on a more steady basis. And -- so that's the answer, I trust, that you are looking for.

[Quang Tung Le, Research Analyst]

Yes. And then another question I would have is more for modeling purposes. Your tax rate in Q1 was about 3%. And this is compared to 12% in Q4 and 9% in 2018. So can you please give some guidance what we should model for your tax rate going forward?

[Charles Dean del Prado]

Yes. We see that the tax rate indeed was very low. So while we still have, as you might be aware of, is our NOLs has fell in the Netherlands as is in the United States. We are -- have done the investments in Korea. And we are, basically, on this one, doing also investments in Singapore that have certain tax advantages, so that we'll -- those tax advantages will in the course of the coming years will decrease. And as a consequence that I expect the tax rate, which will be in the low -- in the mid- to high single digits in 2019, it will gradually decrease in the years to come.

[Operator]

And your next question comes from the line of Tammy Qiu from Berenberg.

[Tammy Qiu, Analyst]

Firstly, I understand that you guys have been working on R&D for next probably 5 years [ to find ]. From the chip maker perspective, at what point do you know for sure that you are in for this application or not in? For example -- and everyone is like on 7-nanometer today. Do you already have confirmation from your customer that you are in for 5-nanometer or 3-nanometer? And on what market share? And my second question is on -- from your perspective, I understand that you don't see a material memory recovery in the second half. What about 2020? What is the landscape? Appreciate it's still early days, but how do you think we are setting at this stage from a memory market, demand/supply and CapEx spending perspective?

[Charles Dean del Prado]

Okay, Tammy. Thanks for your questions. So first of all, yes, when do you know -- well, as you know, we are now already in -- Foundry is preparing for basically ramping its 5-nanometer production. So those decisions have already been -- made quite some time ago. On Logic, 10-nanometer decisions have been made, of course, already quite some time ago. So we're talking about when Foundry 3-nanometer decisions are being made, and Intel and other advanced Logic players are going to make their decisions for their future nodes. And that's -- you know that those decisions are in general made -- the engagements already -- the development engagements are already starts, let's say, 2, 3 years in advance. Really the tools are being put on site and processes are being reviewed in more detail. So between 1 and 3 years in advance, those processes, those solutions are being explored. And then, in the last year, probably between 12 and 6 months, before they start to seriously invest, then you get a better indication of whether you are in or not. And -- yes, that's in general the case. We must say that in some instances, you see that -- yes, you see in some instances, you see the industry changing a little bit and sometimes also solutions that are introduced at a more advanced node that customers are considering to use them also for an earlier node, if they really improve -- significantly improve their performance or reduce their costs, so sometimes they are also -- and maybe we will see that in the future a little bit more. Again, it's not being done -- it has not been done so much so far, but we don't exclude that, that in the future it will happen more. That's in general the picture. Then, 2020 memory. Yes, it's too early to tell, Tammy, but we cannot -- we would not be surprised that at some point in time in 2020, there is a reason for the memory players to start investing again. It would not surprise us, and I think many industry watchers have the same impression that it would surprise many if also 2020 would continue to be a year without meaningful new CapEx in memory. But again, there is nothing that confirms that from a customer point of view, but that's our early view at this moment in time. But we don't expect material recovery in 2019. And that's also what we have assumed so far in our own outlook for the year, except for, again, like I -- we alluded to earlier in the call, some specific customer investments that we are experiencing, second half compared to the first half. But they are not representing an overall industry change in the industry trend.

[Tammy Qiu, Analyst]

Okay. Just a quick follow-up. From your memory customer perspectives, compared to historically, do you see them changing their minds about investment quickly today? Or do you see them getting more kind of plan ahead of the whole game?

[Charles Dean del Prado]

I don't think I can give a very outspoken answer. There are so many elements that play a role in those -- in our customers making those decisions. It's better for you to ask them. And we don't want to speak on that area.

[Operator]

And your next question comes from the line of Peter Testa from One Investment.

[Peter Testa, Analyst]

I have 2 questions, please. Firstly, just looking at the balance of evaluation tools on balance sheet, it's still pretty substantial amount. And I was wondering if you've seen the underlying customer activity products or technologies change, as you now in Q1 and Q2 on the evaluation tools. And whether there's any comments you can make about the potential pull-through of that evaluation tools technology base later in '19 or early '20?

[Petrus Antonius Maria van Bommel, CFO & Member of the Management Board]

Yes, I can answer that. So the eval tools indeed are still pretty healthy on the balance sheet. That's of course very good news because that means a lot is still cooking. So what we normally see is that an eval tool will remain with the customer, somewhere between the 2 and the 6 quarters. And we expect that some of those tools will gradually pull through in our sales turnover, yes? It's too early on this moment to give you guidance on what sort of quarters that it's going go to happen. But I think for the [ second ] reason, so 2 to 6 quarters is a fair time to take into account for pulling through [ tools of our customer ].

[Peter Testa, Analyst]

But can you also give us some view on the technology and market construction of the eval tool base? And maybe whether it's evolving?

[Petrus Antonius Maria van Bommel, CFO & Member of the Management Board]

The eval tools are -- we only put in eval tool with a customer on the moment that's a complete new technology, which has not been proven. When there is a big market opportunity, yes, you're not going to pull in an eval tool with a customer when the only -- when the end demand will be only 1 or 2 tools. And that we are not going to put an eval tool at its premises on the moment that we have to -- which is already been proven by several other customers. So it -- they are really new developments what we're talking about.

[Peter Testa, Analyst]

Okay. But you can't give any sort of more specific indication of what kind of development or nodes?

[Petrus Antonius Maria van Bommel, CFO & Member of the Management Board]

It adds more advanced nodes by definition because the rest have been tested already. So when you think about now, the things when you talk about eval tools than it's in Foundry, it's highly likely more N3 related to some N5 are still related than anything else.

[Peter Testa, Analyst]

Okay. But pulling forward, it's 2 to 6 quarters they've been there now for roughly 2 or 3 quarters, so does that imply you'd expect some others to pull through early next year?

[Petrus Antonius Maria van Bommel, CFO & Member of the Management Board]

We expect that in the next quarters, some more of those eval tools will be pulled through. However, we also hope and expect that new eval tools will go to customers because that will make sure that we can grow further in the years to come.

[Peter Testa, Analyst]

Right. Okay. And the other question I have was just on Foundry. A lot of the revenue -- strong revenue performance is being concentrated around 1 customer and 1 very large prototyping or testing phase of rollout. Can you give a sense as to when you look at your Foundry pipelines, the extent of which that is broadening now off of that base project, either further to that customer or other customers?

[Charles Dean del Prado]

Whether -- okay. The learnings that we have and the penetrations that we have made was in this leading Foundry are assisting us elsewhere. Yes. They definitely are assisting us elsewhere in terms of -- let's say, in terms of understandings what certain foundries in general need. But of course, we cannot transfer, let's say, solution -- customer-specific solutions to other customers. That's what we never do. Only general learnings, we can apply to other customers. And -- but it also depends on how strongly -- more depends on how strongly other foundry players can develop their market position because at this moment in time in the advanced nodes, there is very, very clear leadership. And let's say, the other foundry players are still in progress of developing their positions in those nodes. If your question, are we ready to engage when other foundries come up to speed on those advanced nodes, and the answer is yes. We have strong engagements with those customers ongoing, but it's depending on when they are ready to launch based on their end markets.

[Peter Testa, Analyst]

And also a question around demand from a perspective of passing -- call it passing the baton from your current large engagements to further engagements, whether you would expect that to be something you would feel late this year, early next year or whether it might take a bit longer from a concrete revenue demand perspective?

[Charles Dean del Prado]

I assume that you mean -- I trust that you -- your question is whether success on one product will also feed success may be on other products? It's the same customers, is that what you mean?

[Peter Testa, Analyst]

Well, yes. So the customers or other engagements. I know you're talking to anyone who's working on 7-nanometer foundry. And from that perspective, it's really a question of when they are ready to spend either in follow on from the existing customer or the new customers, as you highlighted. I'm wondering whether this would be from a revenue perspective, a smooth transition, which would mean that they would still -- you'd see business late this year, early next year, or whether there will be -- you're going to -- there'd be a gap in time before, and that next significant revenue base build its way through your P&L.

[Charles Dean del Prado]

Yes, I think, again, we definitely can use all the learnings of penetrations of today as other customers, whether there really is an opportunity to make that happen is more dependent on, let's say, the timing of other customers when they are ready. And we have no indication of, let's say, major foundry spending at other parties this year so far.

[Operator]

And your next question comes from the line of David O'Connor from Exane BNP Paribas.

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

Chuck, maybe a question on 10-nanometer, again. Just wanted to get a better sense on how much legs are left in the 10-nanometer build-out. I'm trying to reconcile some of your previous comments. I think in your introductory remarks, you mentioned, bookings were down in Logic in Q1, Q-on-Q. And yet at the same time, you expect strengths to continue through year-end. With bookings down in Q1 in Logic, is it fair to say we're now over the initial build, and that's what you're referring to as more as the long tail of that build-out? Or can you continue with the kind of current level, maybe quarterly going down? And any kind of sense around how we should model our first year. It would be helpful.

[Charles Dean del Prado]

The only thing we give formal guidance -- financial guidance up to including Q2, the only thing we can say, yes, we already shared earlier in the call is that we do expect the contribution to the top line for Logic/Foundry combined to stay healthy throughout the year based on a healthy climate that we now foresee for that segment throughout the year. And then, there are, within the Logic/Foundry combined segments, there's -- of course, there are differences by quarter between Logic and Foundry. But it goes too far to go into all the detail. Again, we -- and it could be that Logic/Foundry combined, the contribution in the second half is, maybe, modestly lower than in the first half. But at the same time, we think it's going to stay very healthy throughout the year based on today's visibility. That is the best we can say at this moment in time.

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

Okay. But with Logic bookings in Q1 down quarter-on-quarter, are we now over the initial build of 10-nanometer?

[Charles Dean del Prado]

Again, we expect Logic contribution to the top line to stay a healthy one throughout the year.

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

Okay. Got it. And maybe one follow-on as well on the gross margin trajectory for the rest of the year. What should we -- what are the different puts and takes of that for the -- as you look out maybe, Victor, for the rest of the year?

[Victor Bareño, Director of Investor Relations]

Yes, gross margin is developing, as what we have indicated to early. We expect our gross margin to remain in the low- to mid-40s, 2019 is the year, in which we already mentioned that we had a lot of introduction of new products. So initially, that will have some impact on the gross margin you have seen that also within this quarter. So the same sort of development you have seen in the first quarter as in the fourth quarter. We have -- beside that some mix differences, sometimes they could be a little bit more positive, sometimes they are a little bit more negative. They are mostly related to certain applications -- certain customers. And that's basically how we expect also the remaining part of the year to develop within that range of low- to mid-40s.

[Operator]

And we don't have any further questions at this point. Please continue.

[Charles Dean del Prado]

Well, I would like to -- on behalf of Peter and Victor, I would like to thank you all for attending this call on this late Thursday afternoon. Thank you for your engagement with the company. And any questions you may have after this call, feel free to contact, of course, us later today or in the coming days. And I trust that we will stay in touch with all of you. Thank you again, and have a nice day or nice evening. Thank you very much.

[Operator]

That does conclude your conference for today. Thank you, everyone, for participating. You may now disconnect.