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ASM International NV
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Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the ASM International Second Quarter 2023 Earnings Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
At this time, I would like to turn the conference over to Mr. Victor Bareño, Investor Relator. Please go ahead, sir.
Thank you, Judith. Good afternoon. And welcome everyone to our Q2 earnings call. I am joined here today by our CEO, Benjamin Loh; and our CFO, Paul Verhagen. ASM issued its second quarter 2023 results yesterday at 6 p.m. 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 will now hand the call over to Benjamin Loh, CEO of ASM.
Thank you, Victor. Thanks to everyone for attending our second quarter 2023 conference call. Before we begin, just want to remind everyone that we will be hosting our Investor Day on September 26 in London and we hope you can join us either in person or virtually. For today’s call, Paul will as usual first review our second quarter financial results. I will then continue with a discussion of the market trends and the outlook followed by Q&A.
Over to you, Paul.
Thank you, Benjamin, and welcome, everyone. Just for info that I will focus in my remarks on normalized results so the details of the acquisition related PPA expenses can be found in the press release and in the investor presentation.
Let’s now review the results. In the second quarter of 2023, revenue came in at €669 million, up 21% year-on-year at constant currencies and down 5% quarter-on-quarter. Revenue was in line with our guidance of €650 million to €690 million and equipment revenue increased 22% year-on-year at constant currencies whereby growth was mainly driven by non-ALD sales. Overall, ALD sales continue to constitute more than half of the equipment sales.
Spares and service revenue had again a solid performance with 15% year-on-year growth at constant currencies.
In terms of customer segments, revenue was led by foundry with revenue in this segment down quarter-on-quarter and up year-on-year. Combined logic/foundry sales continue to represent a larger part of our sales and were slightly down versus Q1 and fairly stable year-on-year.
Power/analog was the second largest segment and increased both sequentially and year-on-year. Momentum in this market continues to be very strong for our company. Sales of the combined power/analog and wafer manufacturing business, including the consolidation of LPE, more than doubled in the first six months of the year from a smaller base last year and significantly surpassed the size of our currently soft memory business.
Memory sales in Q2 increased somewhat compared to Q1 and were driven by DRAM. However, compared to the run rate of last year, sales in Q2 were down substantially.
Gross margin decreased compared to the exceptional high level of 51.1% in Q1, but was still very solid at 49.0% in Q2 supported by mix and including a high contribution from China.
SG&A expense increased by 10% at constant currencies compared to Q2 last year and by 7% compared to the previous quarter mainly reflecting annual merit increases in April. Compared to the quarterly increases that we have seen last year, the pace of SG&A growth has moderated as most of the investments needed to strengthen the organization were completed in 2022 and also reflecting increased cost control. For the full year 2023, we still expect SG&A to be similar or somewhat lower compared to the Q4 2022 run rate.
Net R&D expenses were up 50% year-on-year at constant currencies driven by an increase in the number of R&D projects. For the full year 2023, we expect net R&D to be slightly higher than the run rate in Q4 last year.
Operating results increased 23% year-on-year at constant currencies with operating margin at 26.9%, up from 26.5% in the same quarter last year. As already communicated in the last couple of quarters, we expect the full year 2023 operating margin to be at 26% or slightly lower as a result of the lower revenue level expected in the second half of the year.
Below the operating line, financial results include the currency translation gain of €8 million and this compares to a translation gain of €26 million in the second quarter of last year and the translation loss of €7 million in Q1 of this year. This is explained by the fact that we hold the largest part of our cash in U.S. dollar and the translation dividends are included in our financial results.
Let’s move quickly to ASMPT. Our share in the income from ASMPT and income from investments reflecting approximately 25% share of the net earnings from ASMPT amounted to €9 million in the second quarter, in line with the first quarter and down from €27 million in the second quarter of last year due to the downturn in the back-end equipment market.
Now back to ASM. Order intake in the second quarter was €486 million, down 48% year-on-year at constant currencies and down 24% compared to the first quarter. The lower Q2 order intake reflects generally weaker market conditions, as well as push-outs in leading edge logic/foundry that we already expected and communicating -- communicated with our Q1 orders. In addition, the drop in orders was also explained by some further normalization of the backlog compared to the elevated level earlier in earlier quarters.
Looking at the breakdown in bookings by customer segment, foundry was the largest segment followed by logic, memory and then power/analog. Combined logic/foundry orders were down quarter-on-quarter and strongly down compared to the record high level in Q2 last year. Memory orders in Q2 increased somewhat compared to Q1 with DRAM accounting for the largest part, but were still substantially down year-on-year.
Let’s look at the balance sheet. Our financial position continues to be solid. We ended the quarter with €490 million in cash, down from €573 million at the end of the first quarter. In the second quarter, we generated a free cash flow of €86 million, down from €121 million in the same quarter last year.
Cash from operations increased year-on-year, but this was offset by higher cash used for CapEx and product development. CapEx increased to €44 million. For the full year, we still target €150 million to €200 million in CapEx with the bulk of the investments relating to expanding and upgrading our R&D infrastructure, including the first part of the recently announced expansion in Korea.
In Q2, we used €123 million in cash for payment of the dividend of €2.50 per share and in addition, we used €50 million for share buyback. As a reminder, during our Q1 results, we announced a share buyback program of €100 million, which started on April 27th, and as the end of last week, we completed 56% of this program.
With that, I hand the call back over to Benjamin.
Thank you, Paul. As Paul just discussed, our results in the second quarter were again solid despite softening market conditions. Most of the semiconductor market segments continued to be slow in the second quarter. Economic uncertainty, inflation and monetary tightening continue to weigh on end market demand.
In addition, key market segments such as smartphones and PCs saw further negative impact from ongoing inventory corrections. Automotive remain a bright spot with continued solid demand. Artificial Intelligence showed a strong acceleration during the quarter spurred by the fast adoption of new generative AI applications, but related chip volumes are still relatively low.
In terms of customer segment, logic/foundry revenue had again a solid contribution in the second quarter and accounted for the largest part of our revenue. This was supported by the solid backlog at the end of first quarter and with further capacity additions in advanced nodes.
In terms of demand, the trend weakened during the quarter and order intake in the second quarter reflected the impact of softer market conditions and push-outs as we already flat with our first quarter results. Continued inventory corrections and weaker than expected end demand led some customers to reconsider their spending plans for this year. In addition, part of the push-outs is also explained by some delays in new fab readiness.
Despite the weakness in the shorter term, logic/foundry remains an important and attractive growth driver for ASM. Our leading customers continue to execute on their technology roadmaps and we confirm their timelines with regards to the upcoming gate-all-around node.
We are confident that the transition to gate-all-around nanosheet technology will result in a meaningful double-digit increase in our served available market as ALD will be required for a growing number of critical deposition steps.
With customer’s process development nearing completion, we believe we are in a good position to maintain our leading edge in logic/foundry ALD and in addition we still expect to increase our share of the Epi market in the transition to gate-all-around.
Gate-all-around nanosheet technology will be key for faster and more power efficient semiconductor devices, which in turn will be required for next-generation applications such as in high performance computing.
We still expect the first meaningful gate-all-around orders in the fourth quarter of this year for pilot line activities planned for 2024. The introduction of gate-all-around in high volume manufacturing by the leading customers are still expected to be in 2025.
In the memory sector, market conditions continue to be tough in the second quarter, as memory prices remain under pressure and manufacturers further reduce volumes to address excess inventory levels.
CapEx is currently limited to some modest technology investments. While we benefited from such investments, particularly with High-K Metal Gate for high performance DRAM, the related volumes are relatively small. Our overall memory sales were substantially below last year sales and that is also what we expect for the second half.
Nevertheless, we believe that we are well positioned for increased sales once the memory market recovers. We have strengthened our positions with High-K Metal Gate in DRAM as mentioned and with ALD gap fill in 3D NAND. We continue to work on additional new applications with the potential for further share of wallet gains in memory in the coming years.
The trend in the analog -- power/analog sector remains overall solid. Demand in consumer related applications further weakened in the second quarter, but this was again offset by continued robust demand in the automotive sector. We mainly play in these markets with our vertical furnaces and part of our Epi portfolio.
On top of market demand momentum remains solid for the new product that we introduced in recent years such as Intrepid ESA and our new 300-millimeter SONORA vertical furnace. As Paul mentioned, combined sales in the power/analog and wafer segments more than doubled in the first half and we expect the continued strong performance in the second half.
Let’s now move to China. Let me now provide you with an update on our business in the Chinese market. A meaningful part of our power/analog and wafer business is generated in China and this was again a very strong market in the second quarter. In China, we have also been successful in winning seven new customers in power/analog in the last few years, which is now translating into significant revenue increases.
Apart from power/analog, we also serve China in the relatively advanced markets. In October last year, as you all know, the U.S. Government issued export controls basically targeted at the 14-nanometer and below technology nodes. We previously communicated that these export controls would have a 15% to 25% negative impact on our China sales.
Recently, the Dutch and the Japanese Government also issued new export control measures. In terms of financial impact, we don’t expect a meaningful additional effect from this Dutch and Japanese measures compared to the 15% to 25% impact already previously announced.
Following the export controls, a number of customers in China have redirected their strategy towards the less advanced nodes and resumed again the related investments. As part of that, investments picked up in technology nodes such as 22-nanometer and 28-nanometer and this investment also contributed to our higher sales in China in the second quarter.
It is important to note that there are also substantial parts of the market in China such as in the 40-nanometer and 65-nanometer markets where investments have increased in a meaningful way, but to this nodes, our company has very limited exposure.
Next on the silicon carbide business. Since the acquisition of LPE, this activity has developed in a very positive way. Demand continues to be strong. Our team remains focused on ramping manufacturing despite supply chain constraints, which are still more challenging in this high growth part of the market.
With a further increase expected in the second half, we are confident that our silicon carbide sales will increase to more than €130 million as earlier communicated. We believe the film quality and cost of ownership offered by our silicon carbide Epi tools are among the best if not the best in the industry. The transition from 150-millimeters to 200-millimeter wafer size offers opportunities to step up our market share.
Our R&D engagements to potential new customers has substantially increased since we announced the acquisition of LPE, and as we mentioned in the press release, after securing a leading North American customer earlier this year, we have now also received the first orders from a major European customer.
Before moving to the outlook, I’d like to highlight the groundbreaking event that we had a couple of months ago in Dongtan, Korea. We plan to invest €100 million in an expanded innovation and manufacturing center. The new facility will more than double our R&D clean room space in Dongtan and is expected to be completed by 2025.
Apart from serving our key customers in the Korean market, we also have our global center for plasma ALD applications in Korea. Here we have developed many leading ALD applications such as our TENZA gap fill solutions, which will see increased usage in both memory and logic/foundry in the coming years. As part of the expansion, we have also increased manufacturing capacity in Korea.
Now turning to the outlook for the rest of the year. We expect sales of between €580 million to €620 million in the third quarter at constant currencies. With the first quarter results, we announced that push-outs and weaker demand in logic/foundry would result in lower orders in both the second quarter and the third quarter compared to the level in the first quarter. This is also what we still expect for the third quarter although we now project the drop in the third quarter orders to be less pronounced than in the second quarter.
For the second half, our view is unchanged. We still expect revenue to be down 10% or more compared to the first half. This reflects the balance of continued weakness in memory, softening in logic/foundry and a continued solid trend in power/analog.
For 2023 as a whole, we still expect our revenue to increase by a single-digit percentage, including LPE and at constant currencies. This compares to the WFE wafer fab equipment market, which is now expected to drop by a mid- to high-teens percentage in 2023. The WFE forecast is slightly more positive than three months ago and for the largest part, explained by stronger mature node spending in China. We still expect to outperform WFE this year.
This concludes our prepared remarks. Let’s now move to Q&A.
We would like to ask you to please limit your questions to not more than two at a time so that everyone has a chance to ask a question. Okay. Judith, we are ready for the first question, please.
Thank you. This is the Chorus Call conference operator. [Operator Instructions] The first question is from Didier Scemama with Bank of America. Please go ahead.
Thanks very much and good afternoon. A couple of questions. First of all, Ben -- Benjamin, if you could give us a bit more color on the Q3 bookings. What’s driving the balance versus Q2? Is it initial gate-all-around orders, is it leading-edge logic/foundry or is it still driven by the mature nodes and particularly in China? And then I will have a follow-up after that. Thank you.
Didier, thank you very much. I think we are confident that the third quarter bookings, of course, compared to the second quarter will be higher and I think we are also seeing that this is not just main -- due to one main factor or one specific market segment, I think, it’s generally a combination of all of them. I think with reference to your specific question on gate-all-around orders, we do expect them in the following quarter which is in the fourth quarter.
Got it. With regards to Q4, I mean, are you in a position to now indicate that Q4 bookings will increase versus Q3 or is it too early to say?
I think the best thing, Didier, for us to kind of guide or give some color is, if you look at both the Q3 and Q4 as compared to Q2, it will be higher, but we are not going to at this stage to comment on the difference between Q3 and Q4. Of course, again, just to highlight that, in Q4 we do expect to receive the first meaningful orders for gate-all-around pilot production.
Got it. Maybe one final question, if I may. One of your largest, if not your largest customer, I think, made some comments on the last earnings call that effectively their CapEx growth in the coming years would trail off versus maybe the last couple of years, which perhaps is not a huge surprise since they have been spending so much in 2021 and in 2022. I wondered whether do you think that these comments are consistent with the guidance you have given at your last Capital Markets Day and whether it makes -- it changes your view if you want of the adoption of ALD and gate-all-around for ASM specifically? Thank you.
I think, of course, Didier, they are speaking with reference to probably next year onwards. I think in our opinion 2024 is still early to make any, let’s say, or give any color. But we do understand that they are still investing according to their technology roadmaps and we haven’t heard anything otherwise from them to the contrary. So we continue to be, I would say, relatively positive about their plans going forward.
Thank you.
Thank you, Didier. Can we go to the next caller, please?
The next question is from Francois Bouvignies with UBS. Please go ahead.
Hi. Thank you. I just wanted to clarify your -- get more focus on the orders again from Didier and especially on Q4, you mentioned that you will have the first orders of gate-all-around. You also said that, you think your customers will add up mass production in 2025. So between Q4 2023 and 2025 mass production, is it fair to assume that the orders will be significantly higher through from Q4 onwards? I am just wondering about the phasing of these orders especially when you talk about the double-digit increase in served available markets from gate-all-around. It would suggest a significant increase in orders from Q4 this year. Is that the right way to look at it or is there any specific phasing we should think about?
Francois, thanks for the question. I think it will very much depend on each individual customer and especially for each one of them, what is the demand, because that is going to determine how fast they want to ramp. And of course -- the other question of course is how fast they can complete their pilot manufacturing.
So I think at this stage, it’s a little bit premature for us to give you any kind of phasing or timelines. But just to maybe highlight that all three of the major players who are going to move into the gate-all-around node, all have confirmed or reconfirmed that they are going to go into pilot manufacturing 2024, high volume manufacturing 2025.
Great. Thank you. Good to hear. And maybe on the memory side, you mentioned that you don’t expect any recoveries through the rest of the year. Is it -- this comment, is it true for orders as well, because the way I understand it is that you won’t see any impact on the revenues. But if we assume the memory markets stabilize and recover for next year, you would -- you should get the orders ahead of it, and that’s what I was wondering if your comment is true for orders, as well as no recovery?
Sure. I think what we have just gone through in the prepared remarks, of course is that, we don’t see memory at least for us recovering and except for technology type of investments, which is small -- relatively small compared to when they add capacity.
I think what we are seeing in the memory market is, consensus is that you are going to see memory chip sales starting to recover not rapidly, but starting to recover and that, perhaps, maybe even early Q3 is the trough and it will recover.
But let’s not forget that the memory chip manufacturers still have a lot of capacity today that they can just turn on and they can ramp up and add significant capacity. So we do believe that except again for technology type of investment or trying to upgrade, for example, commodity DRAM to a high performance DRAM, we do not expect to see a lot of capacity additions for some time.
Got it. Thank you very much.
Thank you, Francois.
The next question is from Stephane Houri with Oddo BHF. Please go ahead.
Yes. Good afternoon. Thank you very much for taking the questions. Actually I have got two. The first one is on silicon carbide. Could you talk about the customer concentration and the size of the order book that you have in silicon carbide since you have announced a second big customer and notably one in Europe? And the second question is about the gross margin, because you keep on surprising positively on the gross margin. So you explained that it’s because of the mix and notably about China, but is there a chance that it continues through the year? Thank you.
Stephane, thank you very much. I am going to answer the question on silicon carbide and Paul will give you more color on the gross margin. So, yes, I think, we are seeing very good traction in the silicon carbon Epitaxy business after the acquisition of LPE and this is a market, of course, that is being propelled with significant growth primarily driven by electric vehicles.
In terms of customer concentration, I think, we are seeing very encouraging development after we took over the company. We have practically engagements with almost every silicon carbide manufacturer in the world and what has been really encouraging is our ability, because they are now part of a larger company with a larger footprint that we have been able to convince and penetrate certain customers that in the past was very concerned about the capability of LPE.
We mentioned a couple of months ago about the first North American customer win and right now we have won a major European customer. Now both the North American and the European customers are, I would say, amongst the major leading players in the silicon carbide business. So we do expect that over time that business is going to grow.
Now in terms of the order book, I think, we will probably not comment at this moment in time. Suffice to say that we are happy with the progress that we are making and we are in a lot of discussions with various customers all over the world.
Then on the margin. Indeed, we had again a strong margin in Q2 of 49%. That was good to see, and of course, as you know, the explanation is always related to mix and mix also includes various elements. And one important element here is again a relatively high contribution from China where you know that we make above average margins. We disclosed that earlier. So that was definitely one element. The other was also that the rest of the mix was actually pretty strong.
Going forward, I mean, I have said that also in previous calls, sometimes we have the highest margin in Q1 and two quarters low and then again high in Q4 or the other way around. Some have two sequential quarters with high margins. I don’t expect this to continue. We target to stay within the 46% to 50%.
The mix is stronger than what you would expect for a full year mix. So also for the subsequent quarters, I would not expect to see this level to be very honest. So that’s what I can tell you. More than that, it’s difficult to say at this stage, but we have seen just two quarters with again relatively high contribution from China and also a strong order mix.
Okay. Thank you.
Thank you, Stephane.
The next question is from Tammy Qiu with Berenberg. Please go ahead.
Hi. Thank you, guys. Firstly, on China, obviously, your demand has been really strong in China. May I ask if your Chinese demand is actually stronger than what you expected back in Q1 or that has always been as strong as previously expected? And also how should I be thinking about China in Q3 and Q4 and also 2024, please?
Thank you, Tammy. I think we will -- actually compared to the first quarter, I think, the second quarter came in very much to what we kind of expected. So I don’t think that there was any surprise.
Now going forward into the second half, I think, there is more uncertainty there. I think there are still a lot of Chinese customers that are also considering how they are going to invest, what they are going to invest into and also because of the market, let’s say, softening, there are certain decisions that are being debated now with the Chinese customers. So I think it’s still left to be seen. But the first half was, I would say, a strong, let’s say, performance for us coming in from China.
Okay. Thank you, Benjamin. And also relating to your 2-nanometer, so you mentioned that in Q4 you will start to have the first batch of pilot line order. Is that going to be coming from all three of them at the same time or some of them will actually come earlier than later?
Sorry, are you referring to gate-all-around?
Yeah.
Yes. Gate-all-around 2-nanometer…
Okay.
… in Q4, please?
Without going again into customer details, I think, we do expect that out of the three customers, we are going to get meaningful first orders for gate-all-around pilot production. I think at least two of them have already confirmed that they will be moving into pilot manufacturing 2024. So I think maybe from there, you can make a guess and all three of them are on track at least at this moment from what we have been told and based on their plans, they will also move into high volume manufacturing in 2025.
Okay. Thank you.
Thank you, Tammy.
The next question is from Alexander Duval with Goldman Sachs. Please go ahead.
Hi. Thank you very much for the question. Just wanted to follow-up on the question about China, and obviously, you stated today, you don’t see any impact from the latest restrictions. But one of your peers stated it does also not see any further impact from any new restrictions that could come in from the U.S. So I just wondered how you see things evolving there? And then just a follow-up on the point about fab readiness, obviously, you referenced the push-outs in logic that affected order intake. How do you think about whether that could create any risk of other push-outs from 2024 into 2025, just want to understand that? Thank you.
Hi, Alex. Sure. So maybe just to clarify. Of course, we follow all the export control regulations 100% and we will only sell and deliver equipment to China fully complying to all the export control regulations and that includes the latest regulations that have been announced by the Dutch and the Japanese Governments. So that’s something that I would like to emphasize first.
Now based on that, there are still certain equipment that we are still able to ship and sell to China. And when we say that we do not see additional impact, this we are referring to the latest Dutch and Japanese regulations, and comparing them to what was announced by the U.S. Government in October 7th last year.
So of course there is speculation that the U.S. Government may announce new regulations coming, we are not going to speculate on that. We will be compliant. We will follow all applications or all regulations when they are announced.
Sorry, fab readiness. Yes, we are seeing fab readiness issues and I think this has also been in the papers or announced by some of our customers. Some of the, let’s say, orders that are being pushed out because of fab readiness, some of them will drop into 2024. But we still need to see when the timing will be, but I would say that, some of them could still end up in 2023 maybe at the end, but some of them could drop into 2024.
Helpful. Thank you.
The next question is from Sandeep Deshpande with JPMorgan. Please go ahead.
Yeah. Hi. Thanks for letting me on. Ben, maybe a question from me. I mean in response to earlier questions, you said that you have not seen a significant change in the second quarter. So are you saying at this point that this improvement you are indicating in the orders in the third quarter, as well as the orders you saw in the -- that nothing really changed in the second quarter after you had changed your guidance in the first quarter? And I have a second follow-up question on 2024. Thank you.
Sandeep, thanks. I think you are correct. We did not see major changes. Probably, what we did see if there was a change was maybe a little bit further softening of the logic/foundry market. That of course has also been informed and announced. I think that was the major change that we see.
But again coming back to our first quarter earnings, we kind of guided to some extent that that was probably what was going to happen. So in terms of additional impact to us, there is really no major change in our outlook.
Understood. And then based on what you see in the market today, do you have any view into 2024, do you see -- I mean, clearly, you have got gate-all-around related shipments which are going to help your orders and shipments into 2024, but how do you see the overall market? I mean you have been giving your commentary on WFE into 2024, do you have an initial view on WFE into 2024 for instance, and of course, how ASMI’s order book looks at this point into 2024 or if at all the order book is predictable into 2024 at this point?
So, first of all, I think, 2024 we think it’s still a little bit too early especially in the context of today’s market where they are relatively higher levels of uncertainty. But I think a couple of things that perhaps we would like to maybe highlight as far as 2024 is concerned for us. One is that we know for sure that is going to be the year of pilot manufacturing for gate-all-around, which has been confirmed by all three manufacturers.
The recovery for memory leading to more investments, I think, that is more uncertain. However, we continue working with all the memory manufacturers in terms of the next node, in terms of the next technology and whenever that comes back for us, I think, we will be in a good position.
The next thing, of course is, if you look at the older technology, the power/analog wafer, I think, that will continue to be resilient. And last but not least, we are of the firm belief that the silicon carbide Epitaxy market in 2024 will continue to grow, in fact, it will still be strong.
Understood. Thank you so much.
Thank you, Sandeep.
The next question is from Janardan Menon with Jefferies. Please go ahead.
Yeah. Hi. Thanks for taking my question. Just on your -- again on the 2024, given that your customers are still on track for commercial volume production of 2-nanometer in 2025, would you expect to deliver any of the commercial orders not the pilot orders to them in 2024 itself or would that be mainly in 2025 say first half or something like that? What I am trying to get at is in the foundry/logic segment, which is the bigger driver of your 2024 revenues, is it the 3-nanometer load adoption or is it the start of the 2-nanometer gate-all-around adoption? And I have a brief follow-up please.
Sure. Hi, Janardan. I think the answer is it depends very much on the speed of each customer. They are starting pilot manufacturing in 2024, how fast they work out all the box and improve the yield, I think, that’s still left to be seen.
I think the other factor that will determine how fast they move into high volume manufacturing and if you work backwards, how fast they order equipment and how fast they want us to deliver will, of course, be demand. So it depends on their customers how fast they are pulling in or adopting 2-nanometer. I think that’s what is going to determine how fast this gate-all-around transition is going to happen.
And is the 3-nanometer demand a factor in your 2024 outlook? Is that a big factor?
I think what we are looking at is if you look at primarily -- let’s put aside the 2-nanometer gate-all-around. So before that it’s all FinFET. I think we will still see demand for leading-edge FinFET nodes. Some of them, of course, as I just mentioned earlier, could be a spillover due to fab readiness delays from 2023. But I think going into 2024, again, the leading-edge FinFET nodes is going to be determined by demand, demand of our customers’ customers.
Understood. And just a brief follow-up, your major customer also announced that they are going to introduce a backfired power rail version of 2-nanometer in 2026. I was just wondering, is that a technology which will have a further step-up from the initial gate-all-around version in 2025 in terms of ALD and Epitaxy, and is that something that you are already engaged with?
Yes. So we are already engaged with, I would say, all of them, and the adoption of backfired power rail or backfired power distribution do require more ALD layers.
Would you describe it as a significant jump or is it sort of a steady increase?
That one I don’t think we would comment, because it’s quite specific to each different customer, but it does require more ALD layers to be adopted.
Understood. Thank you very much.
Thank you, Janardan.
The next question is from Timm Schulze-Melander with Redburn. Please go ahead.
Great. Thank you for taking my questions. I had two, please. The first is, Benjamin, just on normalizing lead time, just looking at ALD for gate-all-around. Could you just give us an update of where we are in terms of the lead time between order and shipment and between installation and qualification, and looking at your China business, does any of that order backlog extend into 2024? And then I had a follow-up. Thank you.
Sure, Timm. I think lead time is something that we are still working through. We have not fully come back to where we would like. I think that today on the average, we are probably looking at six months. We would probably like to improve this a little bit more to get back to more what was pre-COVID or pre-supply chain constraint type of levels. So that’s something that we are working on.
Now even for the different products, some of them are longer, some of them are shorter. So what we are basically saying is average lead time of six months, that’s just to give you an average number. The -- when you talk about install and installation and so on, this is very much depending on the customer and also depending on the application.
Some applications require pretty long installation time and it’s not just the installation, it’s the process tuning, the process qualification, that can take quite some time. So it really varies to a large degree, very difficult to give you for example a firm number or some kind of idea for that. And sorry, Timm, your second question was on China.
Actually the China it was the second part of the first question just asking if there’s a part of the order book that extends into 2024 for China yet?
Well, basically when you look at our backlog, we have -- the way that we count what is in our backlog and what we announce as our backlog is whatever that needs to be developed over the next 12 months. So, of course in the backlog, there are some that are actually for 2024.
Great. And one quick follow-up for Paul, please. Just as we think about gate-all-around shipments initially in 2024, would those be dilutive to gross margin in the first instance? Thank you.
I think. Paul, go ahead.
Thanks for the question. Again it’s hard to tell. The gate-all-arounds will be part of the total mix. It’s depending again on application on customer like typically with new products, we have said that before. Some actually we will see improvement in the margin happening in subsequent quarters because we need to reach certain yield targets. Others will be immediately where they need to be.
So it’s really hard to say if it’s dilutive or non-dilutive. It will be at least supportive of where we are now in terms of 46% to 50%. That’s how we have positioned all this and that’s -- yeah, that’s I think where more than that, it’s difficult to say. Again, it’s quite different from customer to customer case application, so I cannot give you a very, very clear answer on that one.
Got it. Thank you.
Thank you, Timm.
The next question is from Robert Sanders with Deutsche Bank. Please go ahead.
Yeah. Good afternoon. And yeah, I had a question on the analog/power strength that you have seen in recent quarters. I was just wondering if you could just talk about how sustainable you think that is given on the one hand China is spending big, but on the other hand, the western companies seem to be slowing down their CapEx spend? I have a follow-up. Thanks.
Sure. I think, Rob, you are correct. There’s quite some spending on power/analog in China and that’s actually helping us also to drive the revenues in that specific segment, I would say, much longer than in the past.
I think outside of China, it’s more a mixed bag. I think we still see that there are some, for example, western players that are still continuing to invest well, some that are taking a more cautious approach.
I think it’s very much dependent on which part of the market that they are strong in. I mean those that are strong in the consumer area, I think, there is more caution. But those that are strong in the automotive and industrial, I think, they are still fairly bullish about the investments, because they are trying to build capacity planning for the next couple of years ahead.
And just a clarification on the CMD. I am assuming because it’s a two years later CMD, then you will give an outlook that’s two years beyond so 2027. Is that the way we should think about it when you think about the long range plan you will outline? Thanks.
Yes. We haven’t really nailed this down, but most likely that is going to be the case.
Thanks a lot.
Thanks, Robert.
The next question is from Gianmarco Bonacina with Equita. Please go ahead.
Yes. Good afternoon. A couple of questions for me on pricing. If you can give more color about on the difference in ASP on the new tools you are going to sell from Q4 versus the current one on the similar, let’s say, highest node. And then on your silicon carbide business, if you can give also an idea here of what’s the ASP of the tool. So basically on the €130 million in sales, how many tools you are going to sell roughly? Thank you.
Yeah. Let me take the first and then, Benjamin, please add if you want to add. So on pricing, I am not going to give you specific information, but let’s say, our ALD tools are typically on the higher end of our pricing range compared to some of the other tools.
So depending, of course, on the weight of ALD and gate-all-around, if you wish, because I think that was specific to your question, it could have some positive impact on the average sales price, but again it depends on the weight and it depends also on the rest of the mix, but ALD is typically on the higher end of the range.
Silicon carbide is the opposite. It’s typically on a somewhat lower end of this range so that would have a dilutive effect, if you want, on the average sales price. So it’s hard to tell, Gianmarco, to see what this will finally result in. But these are the two dynamics that we have.
Okay. And just a quick follow-up, the new tools you are going to ship in pilot compared to the current high end ALD, they are let’s say significantly higher in terms of pricing or just slightly higher?
Again, Gianmarco, there is a wide range, because there are new tools, and as Paul previously explained, some of these new tools sometimes it takes time before we realize a higher ASP, because we have to work together with the customers. But at the same time when you see the move from one node to the other node, there’s also a lot of tools that have already been in the previous node that are -- is -- which is easier for us in that sense.
So I think when you look at it, it’s very hard to say that, okay, just because we are moving now into a new technology, 2-nanometer gate-all-around, will we be seeing two prices which are going to be higher than before. I think there’s also the dynamics, of course, to make sure that we in the end provide the best cost of ownership for the customers, because that’s really what comes rather than the ASPs.
Clear. Thank you.
Thanks for your questions, Gianmarco.
The next question is from Maarten Verbeek with The IDEA. Please go ahead.
Good morning. It’s -- good afternoon. It’s Maarten of The IDEA. Firstly, when I look at your cash flow statement, I see a very strong sequential increase in the capital development expenditure. Could you put some more light on that item?
Yeah. Yeah. And of course, you are certainly right. So you see an increase in the sales expense but also an increase in capitalization of cost. The growth is in product development and that is simply because of the opportunities that we have that we see. There’s a lot going on. There’s an enormous amount of opportunities that we are working on and you have seen also in terms of gross R&D costs, we were at a run rate level around €90 million, in Q2 we were at €100 million, so €10 million higher.
Net R&D was around €2 million higher I think quarter-to-quarter, but that’s simply driven by the number of opportunities that we work on and in particular also the what we call out-of-pocket costs. So precursors wafers, materials, services that we buy to support these developments and that’s driving it and that is all that needs to be capitalized as part of the development cost and not research. So it was mainly in development not so much in the research.
And what’s the expectation for the year?
The expectation for the year is what I actually already mentioned in the prepared remarks. On net R&D we expect -- so post capitalization we expect to be somewhat higher based on the Q4 run rate of 2022, which was €75 million. So we will be north of €300 million most likely on a net basis.
On a gross basis, we might be somewhat higher there, given again the reasons that I just mentioned, the number of the opportunities that we are now working on. But the net R&D that you see in the P&L will be, yeah, somewhat higher than Q4 2022 run rate.
Thanks. And then I am a bit surprised by the fact that this quarter you booked a positive foreign currency gain. Also when I look at the dollar at quarter end Q1 and quarter end Q2, I should have expected a negative loss?
I have to trust that what we did is correct. I have not really double checked that. I have to assume that it all actually strengthened compared to the end of Q1 otherwise it’s pretty hard indeed to look at positive currency result. I will double check it.
But, yeah, that’s the only thing I can say. It was a positive I believe of €7 million or so. We had a negative in Q1. So I can hardly believe that other currencies would compensate or outweigh the dollar movement. So the dollar is typically the determining factor here. So I will make sure that I will double check this. I will follow-up with you after the call.
Yeah.
Yeah.
Many thanks.
Yeah.
Thank you, Maarten.
The next question is from Marc Hesselink with ING. Please go ahead.
Hey. Yes. Thank you. First question, actually a clarification. All the comments that you made on the order intake being stronger in the second half of the year versus the second quarter. If I am correct, that doesn’t include any cyclical recovery from the leading-edge logic/foundry segment and it’s purely the technological transitions driving that, right?
So, Marc, I think, we will not give this clarification. But we do think that, as I mentioned earlier, it’s a combination of the various market segments that’s going to contribute to higher bookings or order intake for us in the third quarter and the fourth quarter compared to the second quarter.
Okay. And then second quarter, the market share gains that you expect to make in memory and both Epitaxy. Over the course of the quarter, did you make any tangible progress as in application wins or design wins or client feedback that really gives you that comfort that indeed what you communicated at the last Capital Markets Day is indeed still on track?
I think we are very much still on track. I think we are still slowly but surely gaining whatever we can in terms of market share for memory due to increasing adoption of High-K Metal Gate for DRAM and ALD gap fill for 3D NAND and volume is small again, like, it’s relatively small again like I mentioned earlier, but there isn’t really much investments going on. So whatever we can get can be attributed to market share gains.
I think on the what you referred to as Epitaxy, I think, we are making progress in both, let’s say, the advanced CMOS area. Hopefully, the transition to gate-all-around is going to help us further. At the same time, as we have always mentioned in the wafer -- in the power/analog wafer, we have seen increasing adoption of our new products for the Intrepid ESA by our customers and we do believe that that is also helping us to increase our market share.
Okay. Thanks.
Thanks, Marc.
The next question is from Simon Coles with Barclays. Please go ahead. Mr. Coles, your line is open.
All right. Thanks for taking the questions. I just wanted to follow up on the 4Q orders comment being better than 2Q. Why are you not willing to commit to it being higher than 3Q just yet? Is it still sort of the market outlook is too uncertain or can we -- how should we consider sort of what you mean for meaningful pilot orders in 4Q, just trying to square those moving parts? Thank you.
I think we have actually already deviated by kind of providing more color, because we have actually stopped providing any kind of guidance as far as bookings and for a good reason. I think when you look back maybe 18 months ago, bookings were coming in very much higher. It was kind of difficult to predict and that’s why we decided to stop doing that.
I think we are also now in a situation in a market where there is quite some uncertainty, but our belief and based on our forecast, we do believe that the fourth quarter and the third quarter compared to the second quarter, we will have higher order intakes.
Okay. Great. Thank you. And then just one quick follow-up and you seem pretty confident on the pilot line orders and you had two customers confirm. Could we expect that those orders will convert to revenue slightly quicker than the sort of six-month to eight-month lead times that we are used to at the moment?
I think it will be a mixture and the reason for that is, some of the -- we -- amongst our customers, some of them order based on the lead times, some of them they work together with us based on forecast, which means that they do not necessarily just place orders according to lead times, sometimes it can be shorter, so it’s going to be a mixture.
Okay. Great. Thanks very much.
Thank you, Simon.
The next question is from Ruben Devos with Kepler Cheuvreux. Please go ahead.
Yes. Yes. Good afternoon. I am just left with a question on the balance sheet and cash allocation basically. So even in a year with the CapEx spend between €150 million and €200 million, about €100 million is share buyback, it seems you will still materially expand your cash position and then that’s not taking into account the stake in ASMPT, which has also risen drastically. I believe that next year you will trend well beyond the €600 million minimum net cash position, which you talked about in the past. So is it reasonable to assume that you could sort of step up cash remunerations going forward or would you also like to keep some buffer, let’s say, for potential M&A such as for LPE where you diversified tech exposure and client exposure? Thank you.
Yeah. So on cash flow indeed it will, of course, ultimately depend on how the results develop a level of profitability of CapEx, et cetera. But, yes, typically we have good cash delivery. Basically capital allocation has not changed compared to what was communicated. So strong balance sheet remains a key priority.
So indeed we target around €600 million cash balance or maybe slightly more, but around that level. Sustainable dividend we will see if we increase or not increase, but we will decide that next year when we have more visibility and excess cash will go back to shareholders.
So at this moment in time, we do not have, let’s say, there’s no current intention to, let’s say, step up this cash balance. It will become part of the discussion that we have for the Investor Day, September 26th. So the €600 million will be reviewed again if that’s still the number that we want to stick to, but for now it €600 million and before the Investor Day, I think, it’s too early to see if there will be a change or not, that we still have to decide on to be honest.
All right. Thank you. But could you just provide a brief comment maybe on your thoughts around M&A, what your strategy has been there?
Yeah. Same as what we have done and what you have seen last year. So it’s more of an opportunistic strategy. Our growth strategy is mainly focused on organic growth, because there’s so many opportunities that we have to deal with. But we scan the market and if there is something that we believe will further strengthen our portfolio or add something that will, let’s say, support our current deposition strategy, then we might do something. But it’s not, let’s say, our key objective. Our growth strategy that we have, growth through innovation is not dependent on acquisitions.
Not planned [ph]
And how much…
Yeah. It’s not planned for now. It’s opportunistic as I said.
Okay. Thank you.
Thank you, Ruben.
The last question is a follow-up from Didier Scemama with Bank of America. Please go ahead.
Yes. Thanks for squeezing me in. I have got one question on gate-all-around specifically maybe for Benjamin. Is the type of ALD equipment used in gate-all-around layers different from the traditional ALD equipment, are there any specific new materials or gases being introduced in the transition to nanosheets? Just wanted to understand if there is anything materially new in terms of technologies or specifically gross margin or specifically, gross margin or -- sorry, ASPs and gross margin for gate-all-around for your company?
Didier, sure. So again when we move from FinFET to gate-all-around, there are quite some ALD layers that moves together. So for those, there isn’t any material change. It’s just from one node to the other.
But, of course, when you get to gate-all-around and you have mentioned that very correctly, there are certain new materials that are being used and these new materials, of course, are being used for the first time, for example. And of course the application by itself needs to be developed together with the customer, and of course, qualified.
So those are the new materials that, I would say, that are driving new ALD applications and when we get to September 26th at our Investor Day, we hope to provide more color on exactly what we are seeing in terms of especially changes from FinFET to gate-all-around. On the ASPs, again, I think, it’s always a mixed bag, some will be higher, some will be lower. So at this moment, we are not going to comment on that.
Okay. And maybe one quick follow-up. I think if you look at third-party data, I mean they pin your market share in single wafer ALD at anything between 55% and 58%, but obviously, your market share in logic/foundry, I think, you have publicly said is materially higher than that. Can you share with us roughly what your market share in logic/foundry might be in ALD? I mean is it closer to 65% or 70% and can we also assume that it’s going to be even higher given the comments you made just now on the new material introduction for gate-all-around? Thank you.
Again, Didier, we don’t give the breakdown between memory and logic/foundry. But you are correct, it’s -- the 55% to 58% is the average, and of course, we have a much larger play in logic and foundry compared to memory.
We will take this into consideration. I am not 100% sure whether we will share this at the Investor Day, but I think we will probably just continue to guide or share that, what is our market share instead of breaking it out, because it’s quite sensitive and competitive.
Yeah. Understood. Thank you so much.
Thanks, Didier.
Mr. Benjamin Loh, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.
Thank you very much. And on behalf also of Paul and Victor, I want to thank everybody for attending our call today. We do hope to see many of you at our Investor Day in September. In the meantime, stay safe and good-bye.
Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.