ASM International NV

AEX:ASM

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the ASM International Q1 2021 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Victor Bareno. Please go ahead.

[Victor Bareño, Director of Investor Relations]

Thank you, operator. Good afternoon, and welcome, everyone, to our Q1 earnings call. I'm joined here today by our CEO, Benjamin Loh; and our CFO, Peter van Bommel. ASMI issued its first quarter 2021 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 the 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 Benjamin Loh, CEO of ASMI.

[Gek Lim Loh]

Thank you, Victor, and thanks to everyone for attending our first quarter 2021 results conference call. I know it's a very busy day for most of you. And I hope all of you are healthy and safe. Peter van Bommel will first review our first quarter financial results. After that, I will continue with a discussion of the market trends and outlook, followed by the usual Q&A. With that, over to you, Peter.

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

Thank you, Benjamin. In the first quarter of 2021, revenue increased to EUR 394 million, which is up 14% compared to the fourth quarter and is at the higher end of a guidance of EUR 380 million to EUR 400 million. Year-on-year, our revenue was up 21%, and that included a 6% negative impact from currencies. The spares & service revenue increased by a solid 34% and accounted for 19% of total sales. Our equipment sales increased by 18% year-on-year and are led by very strong sales in our ALD product line. In terms of industry segments, the revenue was led by foundry, which was strongly to a new quarterly high. Memory was the second largest segment, with sales up in the quarter, both in DRAM and in NAND. The third largest segment was logic with sales also up in the quarter. The gross margin increased from 45.2% in the fourth quarter to 49.5% in the first quarter on the back of positive mix effects. For Q2, we continue to expect the gross margin in a range of mid to high 40s with again, a relatively favorable mix. Over the last couple of years, we have seen a significant increase in the number of evaluation tools placed with customers. Upon successful completion, an evaluation tool is usually purchased by the customer, which tends to have a negative gross margin impact. In the second half, we expect to complete a relatively higher number of evaluations, which may have some impact on the gross margin in the second half. Having said that, the fact that the customer purchases an evaluation to is also a sign that the tool is now ready for high-volume manufacturing, hence, an enabler for further top line growth. Let's now look at the operating expenses. The SG&A decreased slightly compared to the fourth quarter, mainly due to some quarterly fluctuations in out-of-pocket cost. Our R&D expenses dropped by 18%, due to slightly higher capitalization and the absence of impairments in the first quarter. Excluding these effects, the cash R&D dropped by 5%, reflecting the effects of fluctuations in some incidental expenses. As a result of the higher expected purchases of evaluation tools later in the year that I just mentioned, we project R&D amortization to increase in the second half. Operating profit in the first quarter was up by approximately 60%, both sequentially and year-on-year. Below the operating line results included a currency translation gain of EUR 16 million, mainly explained by the appreciation of the U.S. dollar in the quarter. This compares with a translation loss of EUR 16 million in the fourth quarter. The income tax of EUR 29 million in the first quarter was up compared to the EUR 13 million in the year ago period and is driven by higher profits and a slightly higher tax rate. For 2021, we continue to expect a tax rate in the high teens. The result from our investments, reflecting a 25% share of the net earnings from ASMPT amounted to EUR 14 million in the first quarter. which is down from the EUR 27 million in the fourth quarter and up from the EUR 1 million in the first quarter of last year. As a reminder, ASMPT's fourth quarter results included a couple of incidentals. Excluding those one-offs, ASMPT's profit contribution was EUR 11 million in the fourth quarter. In the first quarter, ASMPT reported revenues of USD 560 million, about flat from the fourth quarter and up 46% compared to the first quarter of last year. Bookings increased to a new quarterly record of approximately USD 1 billion, up 86% sequentially and up 73% year-on-year, especially driven by the higher order intake in the semi segment, which showed both sequentially and year-on-year and more than doubling of the orders. Now turning back to ASMI's consolidated operations. Our new orders in the first quarter were EUR 411 million, which is up 8% from the fourth quarter and up 23% year-on-year. As such, orders were ahead of our guidance of EUR 380 million to EUR 400 million. The equipment orders were led by record high ALD bookings. Looking at the breakdown in bookings by industry segment, logic/foundry, again represented the largest part of the bookings. Foundry showed further strength in the first quarter, while logic moderated somewhat after the increase in the fourth quarter. The memory bookings surged to a new quarterly record with strength in both DRAM and NAND, although the memory segment continued to account for the smaller part of the total. Now turning to the balance sheet. The final financial position of a company continues to be in good shape. We ended the quarter with EUR 498 million in cash which is up from the EUR 435 million at the end of the previous quarter. The increase was driven by a very strong free cash flow of EUR 89 million which was partly offset by EUR 37 million cash used for share buybacks. The free cash flow was driven by the strong increase in profitability and a cash inflow from working capital and was despite the EUR 64 million in cash taxes paid in the first quarter. The working capital decreased in the first quarter, despite the higher activity level with days of working capital dropping to a modest level of 48%. In the first quarter, we spent EUR 9 million on CapEx, down from EUR 31 million in the fourth quarter and following the completion of a new manufacturing facility in Singapore. For this year, we still project a continued higher CapEx level of EUR 60 million to EUR 80 million due to the expansion and upgrading of our R&D labs. Last month, we completed a EUR 100 million share buyback program that we started in June last year. In total, we bought back 646,000 shares under this program. This has been our seventh share buyback program since 2014. During this period, we repurchased in total close to 19 million shares, reducing the share count by almost 30% since 2014. In view of the increase in the cash position at the end of the first quarter 2021, we decided to authorize a new EUR 100 million share buyback. In terms of dividends, as a reminder, we announced a regular dividend of EUR 2 per share, up 50% from last year and for approval by the AGM on 17th of May. Then I would like to close with a personal note. This is my last conference call as CFO of ASMI. Since 2010, when I joined ASMI, the company has made an interesting journey, growing its top line from less than EUR 300 million in 2010 to above the EUR 1.3 billion in 2020, with growth possibilities in 2021 equal to the full year turnoff of 2010. The value from the company has in that period been growing from EUR 1 billion to EUR 13 billion. The company is in a very good shape and thankful to be part of the team that helped to shape the current ASMI. I would like to thank all the employees from ASMI for their support of this great adventure. I would also like to thank our suppliers, customers and investors in providing their trust and support to ASMI in the past 10 years. I wish Benjamin and my successor, Paul Ferarri, every success in bringing ASMI to its next level. With that, I hand the call back over to Benjamin.

[Gek Lim Loh]

Peter, I would like to take this opportunity to thank you again on behalf of everyone at ASM for your tremendous contribution to our company. You have been instrumental in driving strong improvements in the financial performance and you also played an important role in setting the strategic direction. The success during your time at ASM is clearly reflected in the performance of our company's share. Since you were appointed as CFO in 2010, the average annual total return amounted to approximately 30%. Thank you, Peter. Moving on to market trends. Let's now look in more detail on the trends in our markets. It is clear that our industry has started the year on a very strong footing. The digitalization trend that accelerated last year because of the pandemic continues to be a strong driver. The strong recovery that started in Q4 in those segments of the semiconductor market that were hit by COVID, such as industrials and automotive further picked up speed in the first quarter. This combination has led to increasing capacity constraints and shortages in different parts of the end markets. Against this backdrop, the semiconductor market is forecasted to increase by a solid 20% in 2021. Expectations for WFE or Wafer Fab Equipment spending for the full year have also further strengthened. Our expectation is that WFE spending will grow in the high teens to low 20s percentage range, up from the mid-teens percentage that we expected just a couple of months ago. Customer demand is robust across the board, and ASM is in the right spot to benefit. In the logic/foundry sector, spending is expected to show solid growth this year driven by the advanced notes. Our customers are putting in significant investments underscored by recent CapEx announcements in response to projected strong multiyear growth due to secular trends such as 5G, cloud computing and artificial intelligence. This is driving a strong momentum for us in the logic foundry sector, combined with the significant increases in ALD requirements in the most advanced nodes and our continued leadership in this space. In this context, I would also like to highlight Intel's PQS award that we received last March. We are again very honored to receive this prestigious award. I'm also pleased that we earned this award with distinction in safety in 2020. As most of you know, safety has always been and continues to be one of the core focus areas at ASM. Memory is also expected to show a decent increase this year. The combination of limited capacity addition in recent years and improving end market demand, such as in smart are driving improvements in supply-demand conditions. This bodes well for further recovery in investments this year, especially in DRAM. While memory continues to account for the smaller part of our business, we have seen a strong pickup demonstrated by the record high quarterly memory bookings in the first quarter, as just mentioned by Peter. Demand in the power analog market, which was still a headwind for us in our epi sales last year has continued to recover. We expect our epi sales to show a healthy increase this year. Following the solid progress in our R&D engagements in recent periods, we can now confirm that our interpret tool has been selected by a new leading customer as PTOR or production tool of record for an advanced Epi application in next-generation gate-all-around devices. Moving to the longer-term outlook. ALD continues to be an important long-term growth market for ASM. For 2020, we estimate the single wafer ALD market reached size of USD 1.5 billion, in line with the expectations we put out several years ago. We are currently reviewing our forecast and expect to present the new market forecast later in the year. However, it is clear to us that ALD will remain the fastest-growing segment of the deposition market with substantial double-digit growth potential in the coming years. ALD is a critical technology for our industry to develop the next-generation faster processes and memory devices that in turn will enable the growth of key markets such as in 5G and artificial intelligence. Looking at the upcoming notes across the logic/foundry sector, which is expected to move into volume manufacturing within the next couple of years, we expect this to be, again, a strong inflection for ASM with a solid double-digit increase in ALD layers and applications. Based on our current engagements, we also expect that this will drive, again, meaningful increases in our share of wallet with our logic/foundry customers. In the subsequent notes, we expect ALD to become even more important as an enabling technology also for gate all around, GAA transistors with further increases in ALD market demand as a result. In memory, we remain focused on improving our position over time, further scaling in DRAM, higher specs in 3D NAND, the introduction of new materials and increasing device complexity means that a growing number of ALD applications will be required. We continue to be strongly engaged with leading customers in the development of multiple new ALD applications for the next and next, next notes. Once these future nodes move into volume manufacturing, starting in 2022 and 2023, we aim to meaningfully increase our sales from the memory market. Right now, our most significant achievement is expanding our memory presence have been our ALD wins for high-K metal gate in high-performance DRAM with the leading memory players. It is a key technology that reduces device leakage and thereby support increases in both energy efficiency and device performance. As reported earlier, we booked our first meaningful sales for this applications last year, and we expect it to support a healthy increase in our DRAM sales this year. A key event during the quarter that I would also like to highlight was the transfer of manufacturing to our new facility in Singapore, as we also highlighted last quarter. In just 2 months, we transitioned all activities from the old to the new expanded building without disruption to our customers. This is an important next step in our growth story. As we discussed in earlier calls, it immediately doubles our capacity and provides us with additional flexibility to meet our growing customer demands. What is also very important is that we designed this state-of-the-art facility with sustainability in mind. It is a modern and efficient building that provides a safe and inspiring environment for our people to work, and it will support us in our goals to reduce our consumption of energy and water. Now let's look at the guidance we issued with our first quarter press release. For the second quarter, on a currency comparable level, we expect revenue of EUR 390 million to EUR 410 million. Second quarter bookings on a currency comparable level are expected to be in the range of EUR 420 million to EUR 440 million. In addition, based upon our current view, we expect our sales in the second half to be at least at the same level as in the first half. With that, we have finished our introduction. Let's now move on to the Q&A.

[Victor Bareño, Director of Investor Relations]

We'd like to ask you to please limit your questions to not more than 2 at a time so that everyone has a chance to ask a question Okay. Operator, we are ready for the first question.

[Operator]

[Operator Instructions] And your first question comes from Achal Sultania from Credit Suisse.

[Achal Sultania, Director]

Maybe one question, Benjamin, on the high-K metal gate application that you mentioned about DRAM. We saw 1 of your key customers in Korea launch a server-based DRAM product using that high-K metal gate technology. Clearly, as you mentioned, it has meaningful implications for energy consumption. How should we think about the use of that technology for more higher mass volume products going into smartphones and PCs? Is that something that is already starting to happen, or we have to wait for next year? This year is only about servers, and smartphone species is next year. And what's the adoption rate of that technology across other customers in the DRAM space? Any color on that would be helpful.

[Gek Lim Loh]

Achal, thank you, and good afternoon. So first of all, what has been launched today is primarily in what is called the high-performance DRAM segment or subsegment within the DRAM market. And in terms of -- maybe to answer and skip to your -- the second part of your question, it has been adopted by actually all the DRAM manufacturers. And the question that you have post as to how what is the adoption rate, how fast this will move to the other segments of the DRAM market, we can only speculate, but it's really up to our customers how fast they would like to do that. Today, it is primarily focused on the high-performance DRAM segment.

[Achal Sultania, Director]

Yes. And maybe one for -- one on the gross margin. Clearly, gross margins have been quite volatile last few quarters. So just trying to understand, you mentioned evaluation tools will be a headwind for rest of this year. But like what were the major puts beyond the mix? Like is there anything else beyond the mix that actually could act as a positive or a negative driver for gross margins? Like For example, is the Singapore facility? Is that something which has also been adding as a positive contributor to gross margin? Is the scale something which has been also as a positive contributor? Just trying to understand what are the puts and takes for gross margins for the rest of this year?

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

It's a combination, Achal. It's on the one hand, of course, that we have a broader pointing in this moment. So as a consequence, more manufacturing. But what I mentioned already in earlier calls, The impact of that is limited, but it's there. The second thing is low volume of eval tools that have been taken off. You see that also in the balance sheet that The number of eval tools and the value of the eval tools is increasing. We expect, by the way, that also the second quarter that not much eval tools will be taken off. So the headwinds, with a positive note that I mentioned earlier, will only become visible somewhere in the second half. You see also that new products which we have introduced a few years ago that we have efficiencies on those products. So all these things are becoming visible on this moment. So It's a combination of quite a few effects, which -- which have been driving that gross margin. And -- but what remains is that mix remains playing an impact And that's not, as Mata mentioned earlier, on product line dependent, but it's more application dependent.

[Operator]

Your next question comes from Stephane Houri from ODDO.

[Stephane Houri, Research Analyst]

Yes. It's my turn to tell you. Thank you, Peter, for the good discussion in inside and about I have 2 questions actually, which could be only one in a way. I'd like to really understand what you mean by at least at the level of H1 for H2 sales. And if it has something to see or to do with the with the announcement that you've just made about the selection of one of your epitaxy tool for gate all around application? Is it starting already this year? And can you size a little bit the opportunity

[Gek Lim Loh]

I -- first of all, thank you, Stephane, as usual. I think we feel that it's a little bit, I would say, early to really give a concrete guidance as far as the second half because is concerned. And what we see today is that as we have mentioned in our press release, the second half will be at least on the same level as the first half. It has actually nothing to do with our being selected for epitaxy applications for gate all around because I think that one would probably go into high-volume manufacturing in the next years. doesn't impact us this year, but the selection is a critical milestone for us because it's a second key customer for us. I hope that answers your questions.

[Stephane Houri, Research Analyst]

Yes, it does. Right. Because as you know, you are probably publishing your numbers the same day as ASML, and they are guiding for 30% growth. So when we make the calculation, if H2 was just flat or slightly up versus H1, it would make like 20% growth. And we can't just explain the difference only by EUV because EUV will grow by 30%. So I'd really like to understand if there is really an upside or it to that flattish guidance or it's really -- it's really what it is today?

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

No, what you have to see is that we basically try to give you -- there are a lot of people which were raising the question if the second half would drop very strongly. Yes, that we had at the previous call. We had it also with it earlier discussions with some of our shareholders. So to take away that, we normally don't give, as you know, Stephane, guidance about the second half, we thought it is prudent to say that we expect that the second half is at least at the first half without giving further guidance with regard to the third and the fourth quarter.

[Operator]

Your next question comes from Keagan Bryce from Barclays.

[Keagan Bryce-Borthwick]

Just 2 from my side. The first on market share. So Gardner put your market share for single-wafer ALD about 64% for 2020, up from 57%. Did you see that sort of market share increasing own internal estimates? And then I guess more broadly, where do you see your market share across foundry, logic and memory trend in the coming years? Do you think you can gain even further from 2020 levels?

[Gek Lim Loh]

Keagan, thanks a lot. On the market share, Data has been published. I think for us, we do not disclose internal market share But it's broadly in the right direction. So we do expect that we have gained market share in 2020. Your second question, I think, was on, do we see further gains in logic foundry market share. I think what we are trying to do really is to ensure that we keep our leadership position in the logic foundry space while at the same time, trying to grow our position in memory.

[Keagan Bryce-Borthwick]

That's clear. Thanks Benjamin. Then just a quick one on to use. Obviously, you're seeing meaningful double-digit gains in layers and applications for Foundry [ 5 ] and then Logic at [ 10 ]. But is it probably fair to assume that given how -- that we're going to see a pretty low level of to note a node, given just how tight the supply chain is across the industry at the moment?

[Gek Lim Loh]

I think even before this tool reuse was kind of not prevalent. And you are probably correct that we are not going to see a lot of tools reuse because the older node capacities are still being sustained by our customers. So they really do not have the room to take out the tools and we use for the new notes.

[Operator]

Your next question comes from Adithya Metuku from Bank of America.

[Adithya Satyanarayana Metuku, Associate]

Yes. Two, please. Firstly, just looking at the recent changes to the process flow at Intel 7-nanometer Intel has historically used more ALD for permanent players in their products. And I just wondered if you could give us some idea as to how to think about what this simplified process flow at Intel means for early demand. And secondly, I just wondered if you could also give us some sense for how to think about OpEx for the rest of this year. OpEx came in significantly lower than consensus expectations in the first quarter. Should we expect the 1Q levels to continue through the remaining 3 quarters? Or should we expect a step up in OpEx?

[Gek Lim Loh]

Thank you, Adithya. I will try to answer the first question. And then perhaps Peter can give you more color on the OpEx question. I think in terms of logic, we still see the same high level of ALD intensity going forward. And we should not forget that right now what is being developed They are also potentially looking at the next next notes, which means that as we have always explained, ALD intensity will increase. So we do not see a simplified flow reducing ALD intensity.

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

Yes. When you look to the OpEx, we have to make a distinction between SG&A and R&D. When you look to SG&A, that's never a straight line. It's slightly growing. But when you compare also it with last year, then you see that compared to the fourth quarter, which has some seasonality in it, SG&A costs in the fourth quarter are mostly a little bit higher than in the first quarter of the year. So we expect that sort of seasonality also to remain in the course of 2021. With regard to R&D, there, you see also that mostly the first quarter is a little bit lower than the fourth quarter because there we -- I have also some one-off costs And in this case, what I mentioned already in the prepared notes earlier, we don't have incidents in this quarter, so no impairments on R&D projects. And secondly, what is important is since we didn't have too much EVA tools that have been taken off by the customer, that means that no new products are going into high-volume manufacturing. And as a consequence of that, we don't start with the depreciation with amortization of those projects, when we have later in the year more products, which will be taken off by the customer going into high-volume manufacturing Then also the amortization of the older R&D projects of the existing R&D projects will increase.

[Adithya Satyanarayana Metuku, Associate]

Understood. So essentially, I assume the net R&D post the capitalization and amortization effects will go up through the rest of the year, especially in the second half?

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

That's what we expect. Yes.

[Operator]

Your next question comes from Tammy Qiu from Berenberg.

[Tammy Qiu, Analyst]

So first one is relating to your future plan in terms of product portfolio. Currently, you have been focusing on ALD for a few years now. And you started doing actually like 2 years ago. Do you feel like at some point, you may need to add another portfolio such as things like batch ALD or many batch type of tool? And also, will you consider further M&A as a potential opportunity for you to expand your product portfolio at all?

[Gek Lim Loh]

Tammy, thank you very much. On the first question, in terms of product portfolio, I think what we see today and as we have shared in past calls, we have so much opportunity in front of us they're just trying to go after the single-wafer ALD and epi is actually keeping us very busy, and that's what we will continue to do. So no specific plans for additions there. In terms of M&A, again, this is linked to the large amount of opportunities that we have in front of us. We will continue to focus on what the current portfolio and opportunities that we have. If there was something that we would do in terms of M&A, it would primarily be in support our existing portfolio. So we will not go into something else. It could be a technology that might come in handy. But that's the extent of the M&A that we will potentially or be looking at.

[Tammy Qiu, Analyst]

Okay. Cool. And another question comes from -- in terms of your competition within the ALD market. You mentioned that you are getting more design wins at all around either new designs. And your competitor who had a Capital Markets Day a few weeks ago, also talked about active design wins with the new generation of transport sides like it all around. I'm wondering, do you see your competitor in ALD market been aggressive in new applications because of my understanding is that their 2 design versus your tool is slightly different. And if you can talk me through the pros and cons of your design within the new generation of gate all around design.

[Gek Lim Loh]

I think it's difficult for us to provide any comments as far as our peers or competitors are concerned. And so I think the comparison is difficult. In the next technology inflection of gate-all-around. We are very actively engaged with all the major players. And I think the progress that we see from our engagements, and we are very pleased with that. We are positive on that. Now having said that, I think our peer plays in a much larger product portfolio, they have many things that we do not play in. So maybe they might be referring to that. I do not know. But based on our engagements with our customers, we are very, let's say, positive on the developments that we have with them in defining and coming to a closure as far as the gate all around, the process flow is concerned for our equipment.

[Operator]

Your next question comes from Dominik Olszewski from Morgan Stanley.

[Dominik P. Olszewski, Research Analyst]

Just one from my side. Obviously, within the revenue and bookings, hierarchy, as you describe it, in your release, logic has quoted after foundry and memory. So I just wanted to sort of focus there. Could you elaborate on customer demand you're seeing, just given recent statements in the industry and reaccelerate the investment plans there?

[Gek Lim Loh]

Dominik, I think overall, we have all seen various announcements being made I would say, very bullish announcements and announcements that actually we are very excited about. Some of the, I would say, going forward type of demand, we have been informed. So we are aware, and that's what we try to share with you in terms of our guidance. I would say some of them is still being worked out. So that's where there's less visibility for us. And we're also waiting for our customers to try to give us more information. But overall, I think the logic foundry sector would grow in a very positive way this year. And the growth should be both positive and healthy for us because that is our strongest segment as well.

[Operator]

Your next question comes from Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

My question is about the high-k metal gates that your top line now in the DRAM market. Are there other such -- high-k metal gates came into the logic market quite a few years ago. And since then, the logic space has begun using ALD for other layers as well. Are there such other layers that are likely to be utilized in DRAM that will require ALD in the future? And you have some market share in NAND. Maybe you can explain what your supply in the land market today and whether you can expand share there.

[Gek Lim Loh]

Sure, Sandeep. Thanks a lot. You're probably spot on the high-k metal gate started in logic some time ago, and the ALD intensity has gone on to other layers. I think in general, when you look at shrinking, when you look at especially to some extent, also new materials are coming into play. A lot of it actually requires ALD applications because of the the precise deposition that is required. So there is the answer to as far as DRAM is concerned, there is -- there are other new applications that we are working on. Some of them are customer-specific, but there are quite some engagements that we have with our DRAM customers going forward. Hopefully, we get adopted and it goes into a volume production sooner rather than later. In terms of NAND, 3D NAND, what is really driving the ALD adoption is the increasing number of layers, which create higher spec ratios that creates deposition difficulty because it becomes a very narrow type of structure that you need to deposit. And again, that's where ALD comes into play. And we are in the process of working with several, or I would say, actually most of the NAND manufacturers are working on applications that will solve the problem. At the same time, there will be material changes that will come into play. And again, those material changes will require ALD applications. So for both NAND and 3D NAND -- or so with DRAM and 3D NAND, you'll find that increasingly, there will be, let's say, requirement for ALD adoption.

[Operator]

Your next question comes from Marc Hesselink from ING.

[Marc Hesselink, Research Analyst]

I have two questions. First, the increase in the valuation tools you're guiding for Could you explain what that is? Is that a new client? Is it new applications at the existing clients? And is it all the categories in DRAM and in the logic and foundry segment? And my second question is, if we're looking to gate all around, What would that do for the relative weight of deposition versus the literal market? I would see with NAND that move into the 3D, it really was attractive for deposition and edge How do you see that in relation to gate-all-around?

[Gek Lim Loh]

Marc, thanks a lot. First question on eval tools. I would say e-mail tools are usually for new applications. because it's something that -- if it's something that is already well proven already in high-volume manufacturing, usually, we don't do that. So most of the email tools that we have at the customer sites for the next nodes, and there are new applications. And this is the reason why it's so critical to have that eval tool because part of it really requires that we develop and fine-tune the process together with the customers. That's on the eval tools. I think your second part of -- or your second question was on Do we see, for example, get all around having an impact in terms of lithography, Is that what you were saying? Deposition versus lithography? I think when -- Yes. Sure. Sorry.

[Marc Hesselink, Research Analyst]

Sorry, that's indeed what I had. So the relative weight within -- when you make that.

[Gek Lim Loh]

I think it's difficult for us to give you an answer at this moment, considering that we are -- let's put it this way. The gate-all-around process is still in the final stages of being, let's say, worked out. But what we do see, of course, from our own, let's say, business point of view is there's definitely going to be increasing usage of both ALD and actually epitaxy as well. Now, will lithography be able to overcome a lot of the double patterning and so on? My guess is it probably follows the trend as in the usual logic and foundry space. But that's what just my guess.

[Marc Hesselink, Research Analyst]

Okay. Maybe a follow-up on that evaluation. In this specific case, you guide that will be an increase in the second half the year. Can you say what those new applications are? Is that geared to something?

[Gek Lim Loh]

I don't think we can disclose that because that will be giving away a lot, maybe too much. But a lot of the new applications are of course focused at the next nodes and the next next notes. Like I said, again, is a proven application, we won't highly likely, unless there are special reasons, we don't do an evaluation.

[Operator]

Your next question comes from Robert Sanders from Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

I guess the first one would just be about Kokusai being blocked from being sold to applied. I was just wondering if that would end up in Chinese hands, how that might play out for you, obviously, they're more of a batch player. But just be interested to hear what you think about the potential for maybe that for the Chinese to get a head start there? And the second question would just be again on the domestic China opportunity. Have you seen an acceleration since the last time we connected 3 months ago on -- in terms of your outlook for '21 on domestic China?

[Gek Lim Loh]

On the first question, that's a difficult one because we are not involved, so we can only speculate. I really have No idea what is -- whether this is even possible given the current geopolitical situation. So I think the best thing for me to do is to refrain from speculating. On the domestic China, we continue to see healthy business coming from China as we have always shared, the U.S. restrictions has only, let's say, impact on minority of our products. So the majority of our products, we have been able to sell and ship into China without any problems. And the other thing which we probably have shared as well is that over the last 2 years, we have been very encouraged that we have broadened our customer base. So we are not only dependent, for example, on foundry. We now have a presence in memory. We now also have a presence in power analog and also even the wafer manufacturers. So all around, I think our business is progressing nicely in China

[Operator]

Your next question comes from Johannes Ries from Apus Capital.

[Johannes Ries, Founder]

Other two from my side. First, back on the evaluation tools. Evaluation tools also epi tools for new customers, new application? And second, on the midterm outlook, you mentioned all this nice CapEx announcements of large customers. How much gift set that you maybe and your visibility over the year 2021, And so back to your new fab, you mentioned in the past, it could be -- you could even increase your sales by 4x. Now you have the capacity for 2x, but I think it's the shelf and the whole environment. could enable to grow further. Therefore, all at all, how much maybe this, yes, these announcements gives you optimism for the future. And the side remark, even on ASM Pacific, will also maybe the back end even be growing larger because of more than more slower, set a lot of maybe moving to the back end to improve efficiency in the next notes.

[Gek Lim Loh]

Sure. First question -- answer to the first question is, yes, eval tools would also include, for example, epitaxy equipment. We -- it's not just ALD. We do also have to do evaluations, for example, for new epi applications or sometimes to get an entry into our customer. The midterm question of with all the bullish CapEx that has been announced. I guess your question is whether we need to expand further. And that's something that we watch closely. Right now, I would say that we are probably okay. But as you have correctly mentioned, moving to the new facility doubles our space, but we also have a reserve space to even double further. And of course, if the demand is so strong and it becomes and we need to do that, we will probably activate that and try to expand our capacity further. So we watch that very closely. On ASMPT, I think they are actually doing a great job. And when you look at -- it's not just the traditional back end of the business, but we do think that ASMPT has a good position in the advanced packaging space. They have acquired a company called Next a couple of years ago, and they have also developed solutions for the advanced packaging space. So I think going forward, They should be able to carve out a good position for themselves in the growing advanced packaging market.

[Operator]

And your next question comes from David O'Connor from BNP Paribas.

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

Great. Maybe two from my side. Firstly, the second half guide, at least at the same level as H1. Ben, can you give some indication of the mix? What's the kind of expectation there for the mix in the second half versus the first half? And then for my second question, maybe one on just the overall ALD market. You mentioned $1.5 billion in 2020. And you've indicated over last years that has grown at a 20% CAGR. Is there any reason that, that would slow down that growth rate from here, given all the increasing intensity you see across the different device types and the increasing applications?

[Gek Lim Loh]

So David, thank you very much. In terms of the second half, as we said, we provided this to kind of alleviate the concerns or questions about whether the second half was going to see a dip. So at this moment, we are not going to provide any kind of outlook except the general statement that the second half will be at least at the same level as the first half. Your question on the market going to USD 1.5 billion. That was a number that we kind of threw out a couple of years ago based on our own projections. And we do think that in 2020, the market, in fact, reached around its size. Whether -- I'm not 100% sure of the whether the 20% CAGR growth comes from, it could be from one of the research companies. But it is definitely ALD single-wafer ALD, the fastest-growing part of the deposition market. Do we see any roadblocks, anything that will kind of derail this high growth? I would say, at this moment, no. On the contrary, what we see today is that ALD intensity is going to increase as the notes get smaller And as the -- as we have also increasing applications in both DRAM and NAND, it actually increases the -- it will continue to increase, growing at that kind of pace.

[Operator]

And we have another question from Tammy Qiu from Berenberg.

[Tammy Qiu, Analyst]

Brings me to the last question. So I have the last one on ASM Pacific. So given that the cycle between front and back end is not really closely linked together anymore. I understand that there is more for your thoughts on back end to deliver more performance given front end is getting more expensive entry. But do you actually have any reason to keep holding on this piece of asset? And have you thought about a strategic review probably at some point to think about what you want to do with that piece of assets going forward?

[Gek Lim Loh]

Tammy, thank you very much. What we do is we look at our stake in ASMPT today as an investment. And as with any kind of investment that we do review that regularly. For the time being, we do not think that there's any action that is required. So we're going to continue to keep that on our books.

[Tammy Qiu, Analyst]

Why is that, if I may ask? Why do you think it's a good investment for your balance sheet? Because you may be able to use that cash to buy something which is probably more relevant to your core business. And the holding is still small new so that it wouldn't actually measure too much from a market cap perspective.

[Gek Lim Loh]

Tammy, you are correct. But there's also the historical element here that we used to be the majority shareholders and We have kind of a decrease of shareholding over the last number of years. And at this moment, do we -- is there something on the horizon? Or do we need to have the kind of cash the answer. The quick short answer is no. In fact, one of the reasons we are doing a share buyback, of course, is to return excess cash to the shareholders. So If we do see a need, maybe we might do something. But at this moment, we do not see that.

[Operator]

And our last question comes from Jim Fontanelli from Arete.

[James Edward Fontanelli, Senior Analyst]

Yes. So two questions for me. Firstly, just on service revenue. Could you maybe talk through how you're thinking about service revenue for the year? I mean you've been running at sort of low to mid EUR 70 million range for the last 4 quarters. But this year is clearly going to be dominated by very high client utilization inside the fabs. And that's always a good backdrop for service revenue and then for the margin structure inside service revenue. So It would be useful to understand how you're thinking about growth potential for service this year?

[Gek Lim Loh]

Thanks a lot, Jim. I think for us, the way that we look at the space and service business, developing this year is that we will continue to grow in a healthy pace, just continuing from where we actually started or, let's say, what we have done since last year. We're going to continue to try to look at more also what we call an outcome-based kind of service revenues. We started that last year, we saw -- we were encouraged by some of the adoption from some of the customers, and we are going to continue to push for that. For the rest of the year, I think what we are seeing would be that we will grow in a healthy way. And there's no major changes expected as far as our spares and service business is concerned. In terms of gross margin, as we have always said, the spares and service business gross margin is very much in line with our equipment margin. So they kind of track closely. So we do not also expect a significant increase in terms of gross margin. It will be just like our equipment gross margin.

[James Edward Fontanelli, Senior Analyst]

Got it. And just a follow-up on that. Do you -- how do you see service revenue growth versus hardware versus equipment this year? Is it Is it likely to be underperforming hardware growth? Or do you think you can match?

[Gek Lim Loh]

I think that's still left to be seen because we have just finished 1 quarter. And as I said, we still need time to look at how that is going to be. But if you have so much CapEx and so much WFE buying new tools. I would say that is a possibility. But at this moment, we cannot comment on that. It's still too early for us.

[James Edward Fontanelli, Senior Analyst]

Okay. And then secondly, just to understand how you're thinking about cash use. I mean, clearly, you've renewed the $100 million buyback, but I mean that just about absorbs op cash flow for this quarter. Clearly, you're going to be generating significantly more than $100 million in free cash this year. So your net cash balance, which is already high is going to increase. So what are the options you have around cash return? I understand there are various tax impediments in terms of how you can efficiently return cash to shareholders. But what are the options out ahead of you once you burn through this $100 million buyback?

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

Jim, it's the same what we have seen in the past year. So we have share buyback as an option. We have also a dividend as an option. We have extra dividend is an option. So we will look to all measurements that are possible on a certain moment when there is excess cash to use that one way or another for the benefit of our shareholders.

[James Edward Fontanelli, Senior Analyst]

Is there a limit to how quickly you can renew that $100 million buyback authorization, could the cadence of that be every 6 months rather than every 12 months?

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

That's -- we can -- as you know, We have to get approval of the shareholders to buy back certain volume of shares. So we will ask for that again in the next AGM. So I think within that are basically the limitations that we have.

[Operator]

We have no further questions at this time. I would now like to hand back to CEO, Mr. Loh for closing remarks.

[Gek Lim Loh]

Thank you very much. Thank you all for attending our call today, also on behalf of Peter and Victor, we hope soon to be able to meet many of you during one of our upcoming virtual investor event. And hopefully, at the Investor Day in September, face-to-face in person. In the meantime, stay safe and stay healthy, and goodbye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now all disconnect.