ASM International NV

AEX:ASM

Earnings Call Analysis

Strong Quarterly Performance with Optimistic Outlook for 2024

In Q2 2024, ASM achieved revenues of EUR 706 million, a 6% increase year-on-year, surpassing the guidance range. The strong performance was driven by robust ALD shipments and a 20% growth in spares and services revenue. Despite a slight dip in gross margin to 49.8%, the company expects significant growth in the second half, forecasting revenues between EUR 740 million and EUR 780 million in Q3 and a 15% increase for the second half, mainly driven by leading-edge logic/foundry and memory segments. ASM remains optimistic about future growth, driven by AI and advancements in gate-all-around technology.

Introduction and Leadership Changes

In the second quarter of 2024, ASM experienced strategic changes in its leadership. Hichem M'Saad officially took over as CEO in May 2024. To manage operational responsibilities more effectively, the executive committee was expanded with two new members, Pal Ma and Steve Reiter, both with robust industry backgrounds .

Strong Financial Performance

ASM reported revenues of EUR 706 million, reflecting a 6% increase year-on-year, surpassing the upper limit of their guidance range of EUR 660 million to EUR 700 million. Equipment revenue saw a 4% year-on-year boost, driven largely by strong Atomic Layer Deposition (ALD) shipments. Spares and services revenue also performed well, experiencing a 20% increase year-on-year at constant currencies .

Segment Performance

The company’s revenue was majorly led by the foundry segment, followed by memory, and power/analog/wafer segments. Memory sales, particularly for Dynamic Random-Access Memory (DRAM), reached a quarterly record high, driven by ALD and high-k tools for high-bandwidth memory, while 3D NAND revenue also saw significant growth. Conversely, the power/analog/wafer segment's performance was lower than the previous year’s average .

Impact of the Chinese Market

Sales in China remained steady but were lower compared to Q1 2024. The decline was attributed primarily to the mature logic/foundry segment. ASM anticipates a continued decrease in bookings and sales in this segment throughout the second half of the year while seeing consistent demand in the silicon carbide epi market .

Margins and Expenses

ASM’s gross margin stood at 49.8%, which is an improvement from 49% in the same quarter last year but a decline from the exceptionally high 52.9% in Q1 2024. The decline is explained by market mix and strong China sales. SG&A expenses rose by 19% year-on-year, including a one-off tax expense of EUR 8.4 million. Excluding this, the increase was 7%. Net R&D expenses increased by 11% year-on-year, with expectations for further increases in the second half due to higher amortization of development expenses .

Future Outlook

ASM expects Q3 2024 sales to increase further to between EUR 740 million and EUR 780 million, translating to approximately a 15% increase in second-half sales compared to the first half. The company also projects a robust increase in memory sales for the year driven by strong demand for leading-edge logic/foundry products and high-performance memory. Despite an anticipated decline in Chinese sales, ASM remains confident in the mid-term targets presented at their Investor Day for 2025 and 2027 .

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM Second Quarter 2024 Earnings Call.

[Operator Instructions] At this time, I would like to turn the conference over to Mr. Victor Bareño, Head of Investor Relations. Please go ahead, sir.

[Victor Bareño, executive]

Thank you, operator. Good afternoon, and welcome, everyone, to our Q2 earnings call. I'm joined here today by our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its second quarter 2024 results yesterday at 6:00 p.m. Central European Time. For those of you who have not yet seen the press release, it is accessible on our website, 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 and financial reports, which are available on our website.

Please note that the profitability measures mentioned in this call will be primarily based on adjusted non-IFRS figures. For the reported figures as well as the reconciliation between IFRS and adjusted results, please refer to the quarterly results press release.

And with that, I will now hand the call over to Hichem M'Saad, CEO of ASM.

[Hichem M'Saad, executive]

Thank you, Victor, and thanks to everyone for attending our second quarter 2024 results conference call. It's a real pleasure to talk to you today. And as most of you know, I took over as CEO last May. I already met many of you in our previous Investor Days and at other occasions, and I look forward to meeting many more of you in our upcoming investor conferences and road shows. For today's call, Paul will first review our second quarter financial results. I will then continue with the discussion of the market plans and the outlook followed by the Q&A as usual. Over to you, Paul.

[Paul Verhagen, executive]

Thank you, Hichem, and once more welcome, everyone. Before I begin, I'd like to make an organizational announcement following the appointment of Hichem as a CEO, we decided to redistribute some of Hichem's day-to-day responsibility at the executive committee level. As part of that, we expanded the executive committee with 2 new members, both with impressive track records and experience in our industry. Pal Ma, since 2018, with ASM and responsible for the Thermal Products business unit; and Steve Reiter already with ASM since 2015 and in charge of plasma products and epitaxi.

Let's now review the financial results. In the second quarter of '24, revenue came in at EUR 706 million at constant currencies up 6% year-on-year. Revenue was slightly above the top end of our guidance of EUR 660 million to EUR 700 million. Equipment revenue increased 4% year-on-year at constant currencies and was mostly driven by robust ALD shipments, which accounted for more than half of the equipment sales.

Spares and services revenue had a solid performance with 20% year-on-year growth at constant currencies.

In terms of customer segments, revenue was led by foundry, followed by memory and then the power/analog/wafer segment. Combined logic/foundry sales continue to represent the larger part of our sales and were roughly stable, both versus Q1 and compared to Q2 last year. Compared to the first quarter, sales related to the Gate-all-around 2-nanometer technology increased while mature logic/foundry sales were lower.

Memory sales increased strongly both year-on-year and versus Q1. DRAM sales accounted for the larger part of the memory and reached a quarterly record high. This was mostly driven by ALD and high-k tools for high-bandwidth memory. 3D NAND revenue also increased markedly, but that was from a relatively lower base.

Sales in the Power/analog/wafer segment, excluding certain carbides, were somewhat higher than in Q1 but still meaningfully lower than the average trend last year. Gross margin in the second quarter came in at 49.8%, up from 49% in the same quarter last year, but down from the exceptionally high level of 52.9% in the first quarter mostly explained by mix. Part of the mix development is the contribution of China sales, which were still strong in the second quarter of '24, albeit below the record high level in the first quarter.

SG&A expenses increased by 19% compared to the second quarter of last year and by 20% quarter-on-quarter. SG&A included one-off tax expense of EUR 8.4 million resulting from the accelerated vesting of previously granted performance shares. Excluding this one-off item, SG&A expense increased 7% year-on-year. And for the full year 2024, we continue to expect a moderate increase in SG&A.

Net R&D in the second quarter increased 11% year-on-year. For the second half, we expect a higher increase in net R&D due to higher amortization of development expenses. As explained in the previous quarter, this is due to a number of newly developed products and applications, for which amortization is expected to start over the course of the year. For the full year '24, we expect net R&D to increase between 10% and 20%.

Operating margin decreased to 25.8%, down from 26.9% in the same quarter last year. Not taken into account this one-off tax charge that I just mentioned, EBIT margin would have been 27%. Below the operating line, financial results include the currency translation gain of EUR 16 million. This compares to a translation gain of EUR 8 million in the second quarter of last year and EUR 23 million in the first quarter of '24. As a remainder, these currency gains and losses are explained by the fact that we hold the largest part of our cash in U.S. dollars. And the translation differences are included in our financial results.

Then over to ASMPT briefly. Our share in income from investments, reflecting our stake in ASMPT amounted EUR 4 million in the second quarter, down from EUR 5 million in the first quarter and down from EUR 9 million in the second quarter of last year.

Now back to ASM. Our order intake in the second quarter was at a strong level of EUR 755 million, an increase of 56% at constant currencies compared to the same quarter last year and up 8% from the first quarter. Orders were led by memory followed by logic and foundry.

Memory orders increased strongly to a quarterly record high and consisted primarily of orders for HBM related DRAM applications. The underlying trend is robust, especially for HBM, and we expect continued healthy memory demand. It should be noted that DRAM orders were particularly high for this quarter and order intake can be a bit lumpy from quarter-to-quarter.

Total logic/foundry orders decreased compared to the first quarter. Gate-all-around orders were solid and increased somewhat compared to Q1. Mature logic/foundry orders decreased year-on-year and compared to the previous quarter. In silicon-based power/analog, bookings were at a decent level, despite continued market weakness. Silicon carbide Epi orders were solid, the highest level in the past 6 quarters and included multiple tool orders for a new 200-millimeter fab project in China.

Next to balance sheet. We ended the quarter with EUR 637 million in cash, down compared to EUR 712 million at the end of Q1. In the second quarter, we generated a solid free cash flow of EUR 103 million, thanks to continued solid profitability and with only a modest outflow for working capital. CapEx amounted to EUR 36 million in the second quarter. And as a reminder, our '24 target for annual CapEx continues to be between EUR 100 million and EUR 18 million. In Q2, we used EUR 135 million in cash for the payment of dividends of EUR 2.75 per share. In addition, we used EUR 59 million for share buybacks and as part of the EUR 150 million buyback program that was started on May 15. And at the end of June, we had completed 39% of the program and 78% at the end of last week.

And with that, I hand the call back over to Hichem.

[Hichem M'Saad, executive]

Thank you, Paul. Let me first start with a recap of our strategic priorities. After I took over as CEO in May, a number of investors ask if I was going to make any changes to our strategy. My answer is clear. We will continue with our growth-through-innovation strategy. I joined ASM in 2015 and in the past 5 years, I was in charge of the entire product portfolio as well as of research and development.

In 2022, I joined ASM's Management Board, which means I have been privy to many of the decisions that were made over the past few years, including company strategy, investment in infrastructure and so on. I feel very confident that ASM's growth through innovation strategy has been working, evidenced by our strengthened position with key customers and our revenue growth that has been clearly ahead of the industry. It's an exciting time to be in our industry. And I see a bit about where ASM stands in our market today.

The semiconductor market is on a solid growth trajectory driven by structural trends, such as digitalization and electrification. Third-party research firms forecast the semiconductor market to reach a size of $1 trillion by the end of the decade. And AI is expected to account for a meaningful part of the expected growth. In addition, AI will require more powerful and power-efficient computing solution to enable the next-generation AI chips such as AI accelerators and high-bandwidth memory, our customers are working on 3D device technologies and new materials, all of which will require more ALD and Epi steps.

In Logic/Foundry, the transition from FinFET to gate-all-around requires new ALD deposition for gatestacks features a trend that will increase with subsequent generation of gate-all-around, followed by CFET by the end of the decade. We see a similar trend toward more ALD for memory products. DRAM is adopting more advanced logic processes as performance gets enhanced. We are confident these trends will keep the ALD market on a strong growth path towards our earlier communicated forecast of USD 4.2 billion to USD 5 billion by 2027.

We target to keep our leading share in logic/foundry ALD and to step-by-step, expand our position in the memory market.

Another strategic priority is to expand our position in Silicon Epi. We expect Epi intensity to increase in the transition to gate-all-around. Our innovative technology has been accepted by more and more customers.

In our other product lines, we are making selective investments to drive additional growth. A great example is the introduction of our new SONORA system in vertical furnaces, for which we won several new customers in the power, analog and wafer markets. Silicon carbide epi is another attractive product line where we are well placed to expand our position as customers transition to 200-millimeter wafer size. To stay ahead, we are investing in our people. We are investing in R&D, and we are also investing in our infrastructure. A year ago, we announced the new site in Korea, to double our footprint in R&D and also increase our manufacturing in Korea. And in Arizona last December, we announced a major expense for both Epi and ALD R&D.

Lastly, we continue our focus on sustainability. A highlight in the first half of this year, was the achievement of 100% renewable electricity for all of our global operations.

Let's now move to the current market trends. Conditions in the semiconductor market continues to be mixed with a patchy recovery in smartphones and PCs and ongoing weakness in automotive and industrial. Accelerating growth in AI is, however, driving increased, wafer fab equipment investment in high-bandwidth memory and in leading-edge logic and foundry. Momentum in the leading-edge logic/foundry segment is picking up pace, supported by the transition to 2-nanometer gate-all-around. We have again solid gate-all-around orders in the second quarter, up somewhat from the level in the first quarter.

Our customers are reporting good progress and yield improvements in their [ side of ] buying activities. The start of high-volume manufacturing is still targeted in 2025 across our leading customers. Although we already have some orders from customers who want to start initial volume manufacturing for part of their products by the end of 2024. 2-nanometer technology node, offers significant improvement in device performance and in power efficiency.

Our customers have been talking about strong demand for 2-nanometer from their own customers, including from AI-chip makers. Based on customer traction, the gate-all-around transition would be a sole driver for ASM. As previously communicated, our served available market in logic/foundry will increase by some USD 400 million for each additional $100,000 monthly wafer capacity as many new ALD layers are required in gate-all-around devices.

In silicon Epi, we have been selected for various applications by all 3 leading customers compared to 1 leading customer we had in the previous -- since [indiscernible]. A significant portion of gate-all-around orders in the second quarter consisted of Intrepid ES Epi tools for gate-all-around, reflecting our expanded customer base.

In R&D, we are strongly engaged with the next-generation version of gate-all-around for both ALD and Epi. In this next generation gate-all-around, we are working on advanced applications, such as for wide unique adoption of backside power distribution, or metal ALD and on selective. As Paul mentioned, memory was the largest segment of our bookings in Q2. All customers are ramping up manufacturing of high-bandwidth memory to support the surging demand of complex AI computing.

The high-speed DRAM ships used in this HBM tax require high-k metal gate ALD technology, in which we have the leading position. In the coming years, the DRAM industry will move to 4F squared, which we expect to result in additional ALD layers in the gatestack and increasing FE requirement.

While revenue was up in Q2 from a low base, demand in 3D NAND continued to be relatively soft in the second quarter. Following the cuts in investment and production last year, supply-demand conditions are gradually improving, except for technology investments, spending levels continue to be low.

Next, let's talk about China. Our total sales in China were still at a good level, but lower than in Q1. If you look at the different segments within China, the drop in sales was mostly explained by the [ Mature ] Logic/Foundry segment. For China as a whole, we think that Q1 has been the peak for now. Several customers seem to be moving into a phase of digestion.

We expect both bookings and sales in the [ mature ] logic/foundry segment in China to further decrease in the second half. The power/analog/wafer segment, excluding silicon carbide, already started to slow down from the end of last year, not only in China but also globally. The general trend in this segment continued to be soft in Q2 and is likely to remain so for the rest of the year.

Despite the weaker market conditions, we actually booked very decent orders in this segment in Q2, thanks to multiple tool orders from new silicon-power customers in China.

Finally, silicon carbide Epi. Conditions in this market continues to weaken in the second quarter and we now expect the silicon carbide Epi market to be down for the full year. While we've reduced our expectation for 2024, we believe that our silicon carbide sales are still on track for double-digit growth this year as we continued customer pool.

In addition, long-term prospects for this business remains solid. We believe the slowdown in the Epi market is only temporary and will pick up again as Epi penetration rates are expected to increase in the coming years. We continue to have good traction in R&D engagement and new customer evaluations. We reported on another new tool selection in the Q2 press release for a major 200-millimeter silicon carbide fab projects in China.

Moving on to the outlook. As reported in our Q2 earnings press release, we expect sales in the third quarter to further increase to a range of $740 million to EUR 780 million. We further expect sales in the second half to increase by approximately 15% compared to the first half. This means that we are on track for another year of healthy growth.

We expect a strong increase in second half sales from the leading-edge logic/foundry segment predominantly driven by higher gate-all-around related sales. We also project memory sales to increase strongly, both in the second half and for the full year.

As mentioned, China sales are expected to be somewhat lower. Looking at the midterm, we are confident about the targets we provided in our Investor Day last year, for both 2025 and 2027. While it's too early to provide more specific guidance, we expect 2025 to be a good year for ASM. The growth in wafer fab equipment in 2025 is expected to be stronger than the slight increase that forecast for 2024, driven by a further recovery in the memory market and increased investments in 2-nanometer.

This concludes our prepared remarks. Let's now move to Q&A.

[Victor Bareño, executive]

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

[Operator]

[Operator Instructions] The first question is from Sandeep Deshpande with JPMorgan.

[Sandeep Deshpande, analyst]

Hichem, my question is you're seeing strength in the memory market in terms of orders at this point, is this strength based on what you're hearing from your customers likely continue into the future quarters of the year? Or is this going to get replaced by GAA which will be an important driver for you into 2025.

And then I have a quick follow-up. You have this holding in ASM Pacific, I mean can you clarify, I mean, having now become CEO, where this holding stands in your view? Is this a core holding? Or is this a financial holding?

[Hichem M'Saad, executive]

To answer your first question, Sandeep. Thank you very much for your question. And it's really nice to have met you a couple of months ago. For -- we see that the DRAM is really driven right now by high bandwidth. And the high-bandwidth DRAM is actually goes hand in hand with the -- so we don't see a let up in DRAM orders in the future. But at the same time, we can expect to see some lumpiness from time to time. But I think the DRAM, especially the high bandwidth is going to grow in the future as the gate around technology node is going.

As far as your question about ASMPT. I really have no comment right now. I've just started to become a CEO for ASM for a couple of months right now. I didn't really have the time to review any further. It has been a financial holding for us right now, and I don't see any change for this point in time.

[Operator]

The next question is from Andrew Gardiner with Citi.

[Andrew Gardiner, analyst]

I just had one sort of high-level question to some of the points you were just making at the end there, Hichem, regarding the outlook. If I look back over the recent quarters, your quarterly revenue guidance has proven pretty conservative. You've regularly been generating quarterly revenue towards the high end, if not above the guidance ranges that you provided quarter-after-quarter. And again, with yesterday's release, you've sort of edged up the 2024 revenue targets again. And now you'll -- with that, you're within touching distance of a few percentage at the lower end of your 2025 targeted range.

And then if I comment the other way, sort of a top-down basis, your WFE assumptions are looking rather conservative at this point relative to I think anything -- anyone in the financial community looks at or indeed the industry analyst community looks at. So I hear your point that you're confident there, but isn't it going to be time soon to raise that 2025 target? Isn't it simply looking too conservative given the way the industry is going and the market share gains that you guys in particular are making?

[Hichem M'Saad, executive]

I think for this question, I'm going to let Paul give the answer.

[Paul Verhagen, executive]

Andrew, thanks for the question. Yes, as Hichem already said, prospects for next year, we believe, look good or the trends that we see happening in gate-all-around, which of course, will ramp up in the course of next year with 3 customers, which compared to the past, typically advanced now it was with 1 customer. So that in itself already is great -- of course, benefits, we see continued strong demand in memory, particularly DRAM, with some lumpiness from quarter-to-quarter. As Hichem already indicated that Q2 was very high, but also pretty lumpy. So although we expect continued good amount, it might be somewhat lower than Q2, but still good.

So also in other markets, power, wafer and analog is lower than last year, but we saw good demand and hopefully might, let's say, pick up somewhere in the second half. It's still too early to tell, to be honest. At the same time, we see a drop in China, which is still a little bit hard to tell how much that will be, but there will be a level of normalization and digesting. We see it already in mature logic foundry in our order book. So why do I say all this? There's still quite some variables in place. And we believe it's too early to actually touch our guidance. And I think we try to be realistic. You call it conservative. We believe we try to be realistic. You're right, at many times at the high end of our guidance and sometimes marginally exceed it.

But for now, we believe it's everything that we know with all the moving parts that EUR 3 billion to EUR 3.6 billion is still the right guidance for next year? And maybe just I am 100% sure, we have increased it, of course, because of LPE because our initial guidance that we disclosed in '21 was 2.8% to 3.4%. So increased to 3.0% to 3.6%. And again, given all the moving parts, we believe for now, that is still the right guidance for 25.

[Andrew Gardiner, analyst]

Understood. If I could follow up quickly. I mean, you mentioned some of the moving pieces there. In terms of the potential headwind. Would you characterize China as the biggest risk there sort of where you may not have the visibility you have elsewhere with sort of advanced memory and advanced project?

[Paul Verhagen, executive]

Definitely, China will be one of them, given, as you know, what we have said, exceptional levels of investments, we believe, in '24 -- sorry, in '23 and even in the first half of '24 because already in the second half of '24, we see a decline, and that might further continue into '25. So yes, China is for sure a headwind.

At the same time, as you know, our strategy is built around growth in leading-edge logic/foundry gate-all-arounds and high performance and memory, which shows very good and healthy drivers for continued growth. So they will more than compensate, of course, a drop in China.

Silicon carbide is still somewhat uncertain. As Hichem said, we expect actually the market to be down this year, although we still expect double-digit growth. But the question, of course, is what will happen next year. With the Epi markets, it might come back. It might come back towards the latter end. It's still a little bit of the detail that could be out of. Maybe and here today, yes, China is, for sure, almost sure, I should say, down compared to this year.

[Operator]

The next question is from Janardan Menon with Jefferies.

[Janardan Menon, analyst]

Paul, just to follow-on, on that question and answer you gave. I mean your initial guidance for 2025 was in 2021 and you added the LPE numbers to that. But in 2021, China was extremely low. And I would assume that even with the decline that you're assuming in 2025 or with a moderate decline, it would still be much higher than the assumption you made for China in 2021. So I'm just wondering -- I'm just going back to the same question, which is given the whole AI wave with HBM coming up so strongly, which is probably unexpected, even when you gave the 2023 Capital Markets Day. Should there not be some upside on the 2025 guidance if things stay at this level into next year?

[Paul Verhagen, executive]

Thanks for the question, Janardan. Of course, we've given a pretty wide range for '25, 3% to 3.6%. And of course, pluses and minuses, we hope that they can be incorporated in this range. So based on everything that we say, you might maybe expect us more to be towards the higher end of range compared to the lower end of the range, that could be.

So there, of course, is still a difference because, again, it's EUR 600 million difference. That's not a small number for us. So if, let's say, the -- which we expect gate-all-around buildup of capacity will continue as we see it today. If memory continues to grow as we think it will be today. And even with the decline of a larger China, indeed, I think you're right. I think it's a fair assumption. We still believe that 3% to 3.6% is for now the right range. But yes, of course, the more tailwinds we will have in terms of markets and growth that we might not have fully taken into account in '21, the more likely it might be that we go, let's say, more towards the higher end of the range.

But even that, I don't want to guide. This is no guidance. Our official guidance is 3% to 3.6%. A lot of things can still happen. It's still early days, but we are confident about a position in the market and Hichem already indicated, confident about next year based on everything we see today.

[Janardan Menon, analyst]

Understood. And my second question is -- just on the gate-all-around -- 2-nanometer gate-all-around orders, you've said that you got a higher order from that in Q2, but your previous -- in previous quarters, you said that you expected pilot orders in Q1 and Q2 and then the high volume orders from Q3, Q4. I just want to clarify, did you get any high-volume orders in Q2? Or was it still pilot orders? And you also said that some of the orders that came more on the epitaxy side. So is it that we still expect quite a bit of the ALD high-volume orders through Q3 and Q4, especially from the foundry side?

[Paul Verhagen, executive]

Yes. It's a little bit hard to tell Janardan, simply because we -- orders don't come in earmarked pilot or HBM. I mean, maybe to put things in context, we have seen already we had -- last year Q3, you might recall, we had higher orders than anticipated and that was to a reasonable extent driven by gate-all-around, which were partially pull-in Q4, but -- and you are already 4 quarters in a row now. Solid orders from for gate-all-around, both ALD and Epi.

In this quarter, yes, we've talked about it, we believe there will also be some HBM orders. And going forward, it will be more and more for HBM because if you look at the 4 quarters of orders we've received, yes, that's -- if you accumulate that, we don't disclose the number, but that's a decent number. So we think that most, if not all, of pilots has been received. But we never -- again, we never know that they're precise, but that would be, I think, a fair assumption.

[Hichem M'Saad, executive]

Let me add something here and provide you with a broader perspective. I think for -- as opposed to FinFET, Gate-all-around has 3 customers. And in FinFET was really for most of the time, it was just 1 customer. So it's -- the order has taken a long time because it really depends on the customer road map and where they're going to be in HBM. And we have seen in the past few quarters, there is plenty of [ N2 ] and gate-all-around orders. So we see -- I mean, for this quarter, Q2, there's actually a mix, like what Paul has mentioned, mix of pilots and HBM order for [ N2 ]. So we feel confident that this is really what's happening.

Most of the orders are actually customers are getting ready for HBM in 2025. And we expect right now that 2025 is really going to be the start of the gate-all-around HBM technology node.

[Operator]

The next question is from Alexander Duval with Goldman Sachs.

[Alexander Duval, analyst]

I saw in your presentation that you upgraded your expectations to the number of logic devices to be driven by AI. I wondered if you could talk a little more about what specifically drove that? And longer term, to what extent you see that impacting other areas, other than logic that could benefit in ASM?

[Hichem M'Saad, executive]

So I think for AI. AI is driving 2 types of chips. It's driving both logic and also driving the memory. So for logic, you need to have really high performance, mainly for high-performance chips, which is a 2-nanometer technology node, but also with the 2-nanometer technology node, you have also higher efficiency and lower power consumption. So 30% actually lower power consumption than FinFET. So that's huge. And as you know, semiconductors are eating more and more energy. So that's on the logic side.

But also for each AI chips, you have many, many HBM or high-bandwidth memory DRAM. And those high-bandwidth memory DRAM, they are high performers. And when you say high performance, it means that they have more and more logic cores. So the logic part of that really high performance needs lots of ALD and Epi layers. So in DRAM, high-bandwidth memory DRAM, we have lots of ALD and you have lots of Epi. And for the gate-all-around because of the -- just the gate-all-around structure by itself, that needs more ALD layer for dipole layers for phase shifting and so on and so forth. I mean even in the back-end of line, you have actually in the mid-end of line, you have metal ALD and so on and so forth.

So we see -- and also, at the same time, for the logic part for the gate-all-around, as the intensity is higher because the -- right now, what happens is that the -- actually the channel with is defined by Epi for the first time. Before in FinFET, the channel is being defined by etch and litho. Now actually for gate-all-around Epi defines the channel. And you have like 5 to 6 layer of silicon germanium superlattice. So we see for both memory and for both logic, which constitute an AI chip both ALD and Epi intensity increase. And that's where we play right now.

[Operator]

The next question is from Francois Bouvignies with UBS.

[Francois-Xavier Bouvignies, analyst]

My first question would be on this SEMICON West, I mean you had a few slides and discussion and you described the first generation and second generation or GAA with epitaxy later getting another step-up in the second generation. And I was wondering about your market share in epitaxy specifically as you move forward. Because when you look at your forecast, I mean, and your epitaxy road map, it looks like, like you say, you're going to move your market share from 15% to 30% in a matter of 2 years, which is I think, unprecedented to gain so much market share in such a short period of time for the industry.

So given that you compete with one very important players aim at, I was wondering how you think about the market share -- your market share in epitaxy specifically as you go to Gen2, especially in the context where AMS is, I guess, looking at this carefully. And at the SEMICON they talk a lot about this integrated systems where they can bring different proposition. And I was wondering what you think about this value proposition versus yours, I guess, because you don't have that. And sorry, it's a very long question.

[Hichem M'Saad, executive]

Yes. Thank you very much for the question, and it's nice that you saw my presentation in SEMICON. I think that's for Epi. As I mentioned right now, [indiscernible] is the first technology node for gate-all-around. And the second generation is going to be 1.6, 1.4 and the third generation would be 1.0, which most likely we're going to be CFET.

So as you go -- as you go to next generation gate-all-around, 2 things will happen. Shrink is going to happen. So from that point of view, you need more Epi -- is happening there because especially in the contact area, when you have a very small web having better contact will be the best and Epi has a very intimate contact instead of having contact with CDD layer and so on. Actually, Epi will have more and more intensity, just I think from the contact point of view. We see that.

And also, you're going to have -- for some customer, you're going to have like more superlattice layer instead of having 4 layers, you might go to 6 and so on. And when you end up with the with the CFET, actually, that's -- CFET is actually double gate-all-around like NMOS on top of PMOS. So actually, you increase the number of Epi layer from that point of view.

I think that for Epi, I'm not really for Epi -- what we have done in Epi the past few years is really bringing innovation to this technology, which haven't seen innovation for many, many years. And I think with the innovation that we have brought in the reactor technology customers have seen the benefit of it. And that's how we've been able to penetrate and provide value to our customer. As I mentioned before, I mean, we -- as ASM, we have built on the premise of a breakthrough technology innovation and relentless research and really try to provide something that's unique value to the customer.

So we see that we have good technology being adopted by all the 3 logic/foundry players right now. And with continued innovation. I mean we are really not slipping on our laws, and we have very much respectful of competition, but we need to be close to our customer. We need to continue innovation. And that's what we see. And we think that our position is good and as long as we're providing value to our customers.

[Francois-Xavier Bouvignies, analyst]

Great. And if I may ask the second one, it will be shorter. About China, I mean do you still -- is memory a big driver of China demand as well? I was wondering if you were selling a lot to China, memory?

[Paul Verhagen, executive]

Maybe in China, we serve multiple segments. As you know, memory is one of them, but actually not a large one, to be honest. We've said it multiple times. Of course, we see some growth in China, but also in memory, but a key play in the last quarters has been where we've seen what we then call exceptional growth with a mature logic/foundry, which is now actually gradually going to reduce and normalize more, we believe.

Then, of course, last year, we've seen very good growth in the power/analog, but this year will be less. But actually the last 2 years, we've seen very strong growth in power/wafer/analog. And of course, we have consolidated still our silicon carbide business, which we did not have, of course, before '23, which was also mostly China. So -- so adding that together, you get what we have today. But the biggest play that we used to have in the last, let's say, 5, 6 quarters was in mature logic/foundry.

Going forward. I think the focus will be maybe even more on the power/wafer/analog and on silicon carbide and to maybe to a lesser extent, on mature logic/foundry given, again, the exceptional levels of investments we've seen and, of course, also some memory there, but there we are relatively small.

[Operator]

The next question is from Stephane Houri with ODDO BHF.

[Stephane Houri, analyst]

Yes. So I have 2, in fact. The first one is about the gross margin because there is a indeed some volatility around the gross margin, and we were expecting a kind of normalization, but maybe more happening in the second half with China. So with China going down. So can you maybe explain what changed in the mix during this quarter? And how low can the gross margin go if China goes down in the mix? And I have a follow-up.

[Paul Verhagen, executive]

Yes, good question. Thanks. Yes. I mean, as we've said, and you know, of course, multiple times is -- let's say, more China -- let's say, on average means higher margin, less China typically means a little lower margin, simply because pricing is somewhat different in China compared to other markets. And then I think the most important one is lower volume per customer. And the second most important one is that more mature products with sometimes higher throughput compared to, let's say, the initial launch of a product, so you can command more value from your customer.

Yes, it's hard to say. It depends, of course, ultimately, on the mix in China. It depends on the mix outside of China. We have quite a few products each with their own margin profile with different layers with the margin profile of different customers. So yes, the best guidance, again, I know that's not a very satisfying answer, but is this 46% to 50%. I mean, if China would normalize, yes, I think it will be very hard for us to get north of 50%, to be very honest. I've said it more times, it's something, yes, you guys might not want a hear. But I think that is at least as we see it today, the most likely scenario that with a more normalized China, it will be hard to get it structural above 50%.

And I don't think that we're there to achieve that. Could it be sometimes a quarter if the mix really is really very positive that all the points fall to the right side, yes, it could be, but definitely not structural.

[Stephane Houri, analyst]

Okay. And then the follow-up is about the recent, let's say, noise about restrictions, further U.S. restrictions in China. How do you react to that? What is your position? And how could it affect your business?

[Paul Verhagen, executive]

I wish we knew. There is indeed a lot of discussion now on additional control. So very likely they will come. We don't know precisely when, but some maybe come a month or 2 months or 3 months, you'll see. Difficult to speculate. I mean you've seen the newspapers that -- there is discussions between various governments going on and that all kinds of measures are being mentioned, hopefully not implemented, one is the foreign direct product rule. That would be the most severe, if that were to happen. Another thing that could happen is that more fabs will be classified as advanced fabs. Another thing that could happen is that certain applications might be stopped. I mean, yes, we've seen these things in the past as well. But yes, it's really -- we really don't know. If we would know we tell you, but we really don't know. And maybe to give you some comfort, at the end of the day, our growth strategy is not based on China.

Of course, China helps in China has been a good help last year, but our growth strategy is based on leading-edge logic/foundry and high-end memory, that's where we see the inflections happening in the coming years. That's where we see growth, and that's what we need to deliver on our guidance. And in China, of course, where we try to focus on in a selective manner, it is, yes, more and more, it's silicon carbide, it's the power/wafer/analog, which is one more than more and to a limited extent where possible, of course, mature logic/foundry because we do believe that if new export controls were to kick in, then it is likely maybe to hit mature logic finding. But again, we don't know. It's too early to speculate. I mean I don't think that power/wafer/analog is targeted or silicon carbide, but even that might have read, we just don't know. I mean -- so I don't want to speculate, but we're on top of this.

And ultimately, we will be on the receiving end, unfortunately. And we'll see what it means. But again, it's for us not a super major issue, if anything, will come because our growth strategy is focused on years I just mentioned.

[Operator]

The next question is from Ruben Devos with Kepler Cheuvreux.

[Ruben Devos, analyst]

I just have a first question regarding the TAM basically for single-wafer ALD and silicon Epitaxy. I understand that, obviously, for next year, you keep your targets. But for the TAM, how should we be looking at that? I mean, you've had more feedback from the market since the Capital Market Day in September last year, so nearly a year ago. Of course, AI applications, it's been a relatively young and emerging markets. But are there any comments you can make on the TAM for single-wafer ALD and silicon Epi? And how that may look somewhat differently now compared to September last year?

[Paul Verhagen, executive]

Yes. Thanks for the question, Ruben. I mean it's more or less the same answer that I gave before on the overall guidance we gave for next year. Of course, there's positive and negative. There is a lot of moving parts based on also our Capital Markets Day in 2023 so last year, in which we also have taken into account quite a lot of the impact of AI already. We have basically reconfirmed these TAMs and also today, we don't see a reason to change that. So I believe by heart, ALD was EUR 3.1 billion to EUR 3.7 billion and Epi in '25, I think, EUR 1.9 billion to EUR 2.2 billion, EUR 2.3 billion, given where we were last year, where we reconfirmed that we were actually on track and that these TAMs seem to be reasonably well projected. We see no reason at this stage to change that.

[Ruben Devos, analyst]

Okay. Fair enough. And then just on the silicon carbide Epitaxy. I think your wording is somewhat different from the prior release, but my interpretation is that it reached somewhat more bullish -- could you maybe talk about changes in ordering behavior in the past 3 months and how you managed to onboard new customers? And just more generally speaking, there's been -- of course, a lot of news on automotive around the disappointing end demand for EVs, which has even triggered some carmakers to prioritize ICE engine car production again. What do you make of these developments? And how should we think about the end market size? So basically your growth trajectory beyond '24 for silicon carbide Epitaxy.

[Hichem M'Saad, executive]

So I will answer this question. We remain confident about Silicon carbide technology in the future. Yes, we do see a downturn in 2024 because of lower adoption -- slowdown in adoption of EV, especially in the states. But I think medium term and long-term EV adoption is happening and it's going to continue -- so we are very optimistic and confident about the growth of silicon carbide.

The second thing about silicon carbide, I think what we have done this year is actually we have released a new product on 200-millimeter, which is a cluster single-wafer products. We've seen lots of adoption by our customers, both in China and outside of China. That's why we are -- we have double-digit growth in silicon carbide market in 2024, even though actually the market is going down. So we are confident about the market. We are confident about our technology and I think in this power electronics market, which ASM has been a player for the past 40 years on silicon power electronics market. We see these ups and downs, it's part of the technology. I mean, and we have to live with it, but we need to come stronger when the [indiscernible] comes. And I think that's what we have done in 200-millimeter.

[Operator]

The next question is from Didier Scemama with Bank of America.

[Didier Scemama, analyst]

A couple of questions boring questions for Paul. Just wanted to clarify. So you said SG&A this year will be flattish year-over-year. Is that excluding the EUR 8.4 million one-off from Q2. And in R&D, you said it's going to grow 10% to 20%, which is quite wide. So do you expect the capitalized R&D expenses to pick up dramatically in Q3, Q4 because were guiding them to be up in Q2 and they were pretty low, I think. So is that the main culprit? Also on gross margin, I'm glad to hear that being above 50% is going to be tricky without China. But equally, I mean, do you think like 48% is kind of a floor now for your business, even if China disappears or at least declined materially in the second half.

I've got a follow-up for Hichem on the technology road map.

[Paul Verhagen, executive]

Okay. Thank you, Didier. Maybe first on SG&A, what we have actually guided from the beginning of the year onwards will be marginal increase up to 5%. And that's still the case. It's not flattish and much where that came from. But must be misunderstanding. We've continuously said margin of up to 5%, and I think we'll be around 5% for the full year. Excluding indeed this one-off tax charge related to accelerated vesting of certain shares. Then R&D, you're right, it's a big, big range. And you're also right that I already had expected in Q2 a higher increase in amortization actually, some of the projects that I expected already to close in May, so we have one month of additional amortization in June did not happen. They are closed by now. So it will start in July.

So in Q3 and Q4, you will see a pretty significant step-up in amortization. And that is one of the reasons, not the only one, but one of the reasons why net R&D will increase between 10% to 20%. Maybe next quarter, I'm fine to narrow the range somewhat, but for now, we want to leave it at that, but there's also, of course, growth in gross R&D. As you've seen, I think, this quarter from EUR 104 (sic) F million, so it's EUR 114 million, given all the opportunities that we see and that we're investing in to support our growth. But yes, as I said before, net R&D will increase faster than gross R&D because of this step-up in amortization because some projects have reached HBM, and we are now selling these applications and have to start amortization.

Then on the gross margin. Is 48% the floor? I wish I could say. Yes, I mean, I have to go back to 2022, where I think also not a lot, but some quarters have been below the 48%. So it would be, I think, not right to say that it is a floor. So it could still be below, of course, in specific quarters. But if you -- I mean for full year, the safest bet would be around the midpoint, I guess, of the guidance because I cannot give you any better guidance. If I could, I would. But it's -- yes, it's pretty difficult.

[Didier Scemama, analyst]

Full year growth margin, 48% or mean less for the second half?

[Paul Verhagen, executive]

No, no. Just in general. This is not meant for this year, just in general, that was your question, I believe, if China normalizes, could it be below 48%. So the question is yes, in certain quarters, it could happen because we've seen it in the past as well. And then in general, for a full year guidance, yes, the best I can tell you is the midpoint of the guidance, but of course, it could be high on now. I mean that's why we have provided the range. And the answer that I cannot narrow down this range given the margin profile of our products.

[Didier Scemama, analyst]

The next [indiscernible] question on the technology road map, we -- what's your view on 3D DRAM? I mean your predecessor presumably you are quite bullish on 3D DRAM. And we're starting to see now the few R&D papers and patent applications for many of your DRAM customers around 3D DRAM, so my question is, a, what's the time frame of adoption? I think initially, you were talking about 27%, but it feels like it's a bit further out. And then b, what's the market for 3D DRAM and that cannibalize HBM, what sort of end markets are you thinking about?

[Hichem M'Saad, executive]

Okay. Thanks for your question, Didier. For 3D DRAM, if you look at the DRAM technology node right now, as I mentioned earlier, there is a shrinking from the cells structure from 6F squared to 4F squared. And that's going to happen in the next couple of years. So we see that for squared DRAM node is going to continue to '27, '28 and '29. And after that, starting in 2030 at the earliest we see the transition to 3D DRAM. You mentioned like 3D DRAM 2027, maybe you heard it, but I think for us, it was really always that 3D DRAM is 2030 -- starting in 2030 at the earliest.

Customer is actually working on the road map right now on 3D DRAM because it's newer cell architecture. So we need to start very early to do some R&D and we're engaged actually with our players on this. But I think the HBM part will start at the earliest is 2030.

[Operator]

The next question is from Timm Schulze Melander with Redburn Atlantic.

[Timm Schulze-Melander, analyst]

Great. Actually, my first one is a follow-on from Didier's question around that road map for DRAM, probably a question for Hichem. Just if you could help with some color around the market opportunity and that kind of served or target available market, how that changes from 6F squared to 4F squared. And then admittedly very early days, but is there any kind of scaling of what that might be at 3D DRAM? And then I have a follow-up.

[Hichem M'Saad, executive]

I think if you look into -- when you go from 6F squared to 4F squared,that's many shrinking of the cells structure, but also you see some increase in ALD intensity. I think part of that is because the lower capacitance happened and higher leakage. So you need some different ALD layers with low-k value, et cetera, et cetera. And when you go to 3D DRAM, which it's a totally different structure. There are 2 things happening. When you go to 3D by definition, you're going to have a very high aspect ratio gapfill, so that we see lots of ALD layers happening for gapfill. The reason for it is ALD has a very conformal film. So that those high aspect ratio feature would tend to favor ALD. Same thing that's really what happened in 3D NAND. I mean, you see many ALD gapfill opportunity in 3D NAND. The same thing is going to happen for 3D DRAM.

One big difference in 3D DRAM, we see is actually in the Epi part of 3D DRAM. I think the structure is actually going to go to silicon, silicon germanium. So if you if you look at the 3D NAND, you have ONO structure, which is oxide nitride, which is mainly deposited by [ PCBD ]. In 3D DRAM, we're going to have lots of channel films silicon, silicon germanium. So 100 superlattice structure, and those will be actually Epi -- epitaxy. So the growth in epitaxy and 3D DRAM would be very significant from that point of view.

[Timm Schulze-Melander, analyst]

Great. That's very helpful. And maybe just a longer-term question for Paul. When you referenced the profitability of China, one of the things you talked about is how tools have developed since their initial insertion and that allows you a better profitability point -- just as we think about your business, very big picture, China going down gate-all-around, high-bandwidth memory going up and that mix, you're saying with China coming down makes that 50% gross margin level a tough one to breach. If you roll forward sort of 5 or 8 years, does that picture change maybe as the product set matures and pricing improves on your gate all around and high-bandwidth memory chipset.

[Paul Verhagen, executive]

It's a good question. And of course, we will try, of course, what we need to do to improve margins, of course, going forward. It's too early to tell where we will be at that moment in time, which will also depend on the mix. So the product, of course, with a better mix will further increase relative to today that for sure, will also be a help. So yes, I'm not saying no. I'm not saying yes, it's too early. As I said before, I'm looking at a wider range of margins and you guys look at that from higher to lower than the guidance we've given. -- we are focused on margin because margin feature R&D, we on to come with differentiated propositions. We have good margins into the market. and the margin that we can continue to differentiate. So that's the philosophy that we try to do. But again, it's too early to tell how we will develop in 5, 6 years from now.

[Timm Schulze-Melander, analyst]

Okay. And maybe just 1 quick one. Was the book-to-bill above 1 in logic/foundry across your business in 2Q?

[Paul Verhagen, executive]

In total, it was, but I don't know it by heart, to be honest. I would really have to look at the numbers. I don't know by heart. I'm sorry, Timm.

[Victor Bareño, executive]

I think we are running out of time. We have time for 1 final question. There are still more callers in the queue. So if you didn't have a chance to ask your question, please contact us after the call. Operator, can we go to the final question?

[Operator]

The final question is from Robert Sanders with Deutsche Bank.

[Robert Sanders, analyst]

Just on the HBM orders, are those for delivery in 2025 or '26. I guess the reason I'm asking is it does seem like most of the greenfield HBM fab won't be ready for equipment until 2026. So I'm just wondering if people are ordering earlier for 2026 greenfield? Or these are just conversions that are happening?

And related to that point, I'm just sort of interested to understand a bit more about the high-k metal gate transition. It seems to be quite correlated with DDR5, but I'm just trying to understand if it's DDR5 correlated, you're already kind of 40% of the way through the transition? Or are you, in fact, much less of the way through the transition because maybe high-k metal gate is not used in mobile or PC?

[Paul Verhagen, executive]

Yes. On -- let me take -- because we did not fully -- the line was break up a little bit, but I think the first question was on HBM orders, I think, up for delivery in '24, '25 orders today. I think a reasonable chunk delivery is likely to be in '20 -- so next year is '25. So next year. So '25. There might be some of that for sure also in this year. But I think the reasonable chunk given the lumpiness of what we received in Q2 is likely to be for delivery also to a reasonable extent in '25, but also some in '24. I'm pretty sure. I don't know the delivery dates by heart, of course, but that's the most logical assumption.

Then the last part of your question, we couldn't hear because of -- I know there was some disturbance in the line. So can you repeat that?

[Robert Sanders, analyst]

Yes, it was just about high-k metal gate penetration. Can you just run me through how far along high-k metal gate is in terms of penetrating the DRAM footprint. Are we in the early innings? Are we halfway through like DDR5 is? Just checking if you can hear that as well.

[Hichem M'Saad, executive]

So I think I will answer this question. For high-k metal gate for -- in memory, I think you look into any high-performance memory right now, the DDR5 is one of them uses high-k metal gate. So -- it's not in the first inning, maybe like halfway. I think the adoption is there. It's getting more and more. We see it with every technology node, I think you're going to see more and more adoption of high-k metal gate ALD. And also HBM memory has actually -- is taking that in growth. So any high-performance DRAM being HBM or otherwise actually adopting high-k metal gate.

[Robert Sanders, analyst]

Got it. Maybe I could just squeeze in one more question, which is just about the entity list. -- the U.S. -- your competitors seem to be alleging that Dutch and Japanese companies are somehow favored in China. Are you conforming to the U.S. entity list, for example, entities like YMTC, are you able to ship to them? Or do you have your own entity list that's driven by your own government? I'm just trying to understand if there's any credibility to this idea of Dutch and Japanese companies having an advantage in China?

[Paul Verhagen, executive]

We are also the same entity list as our, let's say, American peers. So there's no difference. Actually, the Dutch and the Japanese don't have the concept of entity list. But -- for us, it doesn't really matter. The U.S. regulations, it's extra territorial powers. And we also cannot, let's say, as you say, definitely, we have to adhere to the same entity list as our U.S. peers. So no difference from that point of view.

[Operator]

There are no more questions registered at this time. I'll turn the conference back to the CEO for any closing remarks.

[Hichem M'Saad, executive]

[Audio Gap]

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.