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ASM International NV
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Good day, and thank you for standing by. Welcome to the ASM International Q3 2022 Earnings Call. [Operator Instructions]
I would now like to hand over to your first speaker, Mr. Victor Bareno. Please go ahead.
Thank you, Nadia, and welcome, everyone. I'm joined here today by our CEO, Benjamin Loh; and our CFO, Paul Verhagen. ASM issued its third quarter 2022 results yesterday evening at 6:00 p.m. Central European time. For those of you who have not yet seen the press release, it is available on our website, asm.com, along with our latest investor presentation.
Please let me remind you that this conference call may contain information relating to ASM's future business and results in addition to historical information. For more information on risk factors related to such forward-looking statements, please refer to our company's press releases, reports and financial statements, which are available on our website.
And with that, I'll turn the call over to Benjamin Loh, CEO of ASM.
Thank you, Victor, and thanks to everyone for attending our third quarter 2022 results conference call. The agenda for today's call is as follows: Paul will review our third quarter financial results, I will then continue with a discussion of the market trends and the outlook, followed by our usual Q&A session.
And before I hand over to Paul, let me first comment on the impact of the new U.S. export control regulations as we also reported in our press release. This new export regulations were announced by the U.S. government on October 7, and we shrink the export of certain technologies to advance fabs in China. Compared to the previous regulations, the new regulations are much broader in scope. As a result, we expect these regulations to negatively impact our sales in China, as also indicated in our press release. Paul will explain later more about the impact on our Q3 order intake.
As we discussed in previous occasions, we grew our sales in China to more than 10% of our total group in the last couple of years. And step by step, we further expanded our position in the Chinese market, including local customers in the logic foundry, memory space and the market for our power analog and wafer manufacturers. In the first 9 months of 2022, our equipment sales in China accounted for 16% of total revenue. Our focus is to serve all our customers in the best possible ways, while always complying with the applicable regulations.
And with that, I hand over to Paul.
Thank you, Benjamin, and thanks, everyone for joining this call. Let's go to the third quarter results. In the third quarter of 2022, our revenue increased to EUR 610 million, up 9% from the second quarter. Compared to the third quarter of last year, revenue increased 33% at constant currencies and 41% on a reported basis. Revenue in the quarter was above our guidance of EUR 570 million to EUR 600 million, despite continued supply chain challenges in the quarter.
Spares and service had a solid quarter with growth of 17% at constant currencies, and equipment revenue in the third quarter increased 37% also at constant currencies, driven by high record ALD sales and also Epi sales increased strongly and reached a quarterly high. By customer segment, revenue in the third quarter was led by foundry, followed by memory, and then logic. Both logic and foundry sales decreased somewhat compared to the previous quarter, but were up year-on-year. Memory sales increased strongly to a new quarterly record, especially driven by 3D NAND and following the increase in memory bookings in the previous quarters.
Gross margin improved to 48.1%, up from 47.5% in the second quarter and from 47.2% in the third quarter of last year. This increase was mainly driven by a stronger application mix. Cost inflation has continued to go up. So far, we've been able to manage it well. In 2022, we have been able on average to reduce the relative cost of goods of our tools, in particular, in the first half of the year and to a lesser extent, in the second half of the year. For next year, we project cost of goods to increase, although it's too early to tell to what extent. To offset these cost increases, we will focus on increasing sales prices where possible. And so far, we've seen initial success.
SG&A expenses increased 41% at constant currencies, mainly due to headcount growth and higher employee-related compensation. As explained in previous quarters, we have been strengthening various parts of the organization such as in customer field support and IT. And in the fourth quarter, we expect a gradual increase in the SG&A compared to the third quarter. Net R&D expenses increased by 51% year-on-year at constant currencies. In view of our strong pipeline with new applications and upcoming inflections, we continue to grow our investments in R&D. And for Q4, we expect a further sequential increase.
Below the operating line, the results included a significant currency translation gain of EUR 25 million in Q3, similar to the gain in Q2. We keep a significant part of our cash in U.S. dollars and the strong appreciation of the U.S. dollar was the main explanation for the translation gain in the quarter. Our reported net results include an impairment of EUR 321 million of our stake in ASMPT in Q3, triggered by the reduced market valuation in the recent period. There is no cash impact. Following this impairment and in line with our accounting policy, the changes in the market value of ASMPT will be included in our quarterly net results in case of further decline or until the impairment charge has been reversed.
Let's move now to -- briefly to ASMPT. The normalized results from investments, which reflects a 25% share of the net earnings from ASMPT, excluding the impairment, decreased to EUR 20 million in the third quarter, down from EUR 27 million in the second quarter and down from EUR 28 million in the third quarter of last year. ASMPT reported sales of $581 million, down 12% compared to Q2 and down 27% from Q3 last year. Bookings amounted to USD 462 million in the quarter, down 22% sequentially and 37% year-on-year.
Now turning back to ASM's consolidated operations. Our new orders in the third quarter were EUR 670 million (sic) [ 676 ] million, down from EUR 943 million in Q2 and up from EUR 625 million in the third quarter of last year. Our Q3 orders include the negative impact from the new U.S. export regulations, as just mentioned by Benjamin. We expect more than 40% of our sales in China to be impacted by the new export restrictions based on our preliminary assessment. And taking a conservative view, we decided to fully derisk the backlog by taking out all orders that we expect we cannot ship to Chinese customers in the coming periods based on our assessment of the new export restrictions.
We reduced our Q3 order intake and the related backlog with all such orders received during Q3 and in prior quarters that are still to be shipped in the next quarters. Excluding this negative impact, the decrease in our order intake compared to the record high level in Q2, we have been much more moderate. We've also taken expected impact into account on our Q4 sales guidance of EUR 600 million to EUR 630 million. And even including the adjustments related to China, Q4 sales are expected to be roughly flattish or up compared to the level in Q3. And finally, as we also mentioned in the press release, China has been a growing part of our business with, in general, above average margins.
If we then look at the breakdown of bookings by industry segment, foundry was the largest segment in the third quarter, followed by logic and then memory. Combined logic/foundry bookings were down sequentially, but were up year-on-year and continued to account for the largest part of our bookings. Memory orders were down, both compared to the record high in Q2 and year-on-year. DRAM accounted for the larger part of memory bookings. The order intake in Q3 also incurs a very solid contribution from the power analog and wafer manufacturers segment. By product lines, bookings continue to be led by ALD. Of note, also our Epi bookings has very strongly increased to a record high in the quarter.
Now turning to the balance sheet. We ended the quarter with EUR 670 million in cash, up from EUR 552 million in the previous quarter. Please keep in mind that we closed the acquisition of LPE on the 3rd of October, so the cash position at the end of the third quarter did not yet include the financing of the acquisition. As announced, we paid EUR 283 million in cash in addition to 603,000 (sic) [ 631,000 ] ASM shares for LPE.
The increase in the cash position at the end of Q3 was driven by a strong free cash flow of EUR 122 million in the quarter, including EUR 17 million in dividends received from ASMPT. The increase in free cash flow was supported by a continued solid operating profitability, along with a lower cash outflow of working capital compared to the second quarter. Working capital at the end of the quarter amounted to EUR 432 million compared to EUR 386 million at the end of June 22. This was mainly driven by higher inventories, which can be explained by the ongoing supply chain issues.
CapEx in the third quarter amounted to EUR 21 million and year-to-date capital expenditures amounted to EUR 64 million. We still expect CapEx for the full year to come in towards the higher end of the range of EUR 60 million to EUR 100 million.
And with that, I hand the call back to Benjamin.
Thank you, Paul. Let's look in more detail at the trends in our markets. We delivered a solid performance in the third quarter. Our revenue reached a new quarterly record in Q3. It was the eighth consecutive quarter of sequential revenue growth despite the supply chain challenges that also persisted in the last quarter. Our team continued to execute well in close cooperation with our suppliers and customers, and we also benefited from actions we took earlier such as the qualification of additional suppliers. For the fourth quarter, overall supply chain conditions are likely to show moderate improvements, but we don't expect the constraints to be fully resolved.
[Technical Difficulty]
[Operator Instructions]
Everybody apologies. I think somehow, we've got to disconnect. So I'm going to start with the market trends again. We delivered a solid performance in the third quarter. Our revenue reached a new quarterly record in Q3. It was the eighth consecutive quarter of sequential revenue growth despite the supply chain challenges that also persisted in the last quarter. Our team continued to execute well in close cooperation with our suppliers and customers, and we also benefited from actions we took earlier such as the qualification of additional suppliers.
For the fourth quarter, overall supply chain conditions are likely to show moderate improvement, but we don't expect the constraints to be fully resolved. WFE for the full year 2022 is now expected to increase by a high single-digit percentage. This is a reduction compared to the earlier expectation, which was an increase at the lower end of mid- to high-teens percentage. Taking into account the guidance we provided for Q4, we expect to clearly outperform WFE this year.
During the third quarter, the semiconductor end market further slowed down with significant declines in the PC and smartphone segment. Combined with an expected deceleration in global economic growth and the impact of new U.S. export regulations, WFE spending is forecasted to be down in 2023, in particular, the memory segment. It is too early to provide guidance for next year, but ASM is well positioned with an expected robust backlog by year-end and on the back of our leading position in the leading-edge logic/foundry segment, which accounts for the largest part of our sales and good traction we are having with our new products and applications.
If we then look in more detail at the different segments, a leading-edge logic/foundry demand remains strong. We continue to benefit from solid spending by leading customers as they are ramping their newest nodes into high-volume manufacturing, such as the 3-nanometer node in the foundry segment. The mix of these newer nodes in which we have strong share of wallet has further increased in the quarter. While parts of the logic/foundry end markets have also been slowing down, we expect investments in the most advanced-node capacity to continue into next year.
The midterm outlook remains strong. ALD and Epi are key enablers of gate-all-around technology. Our R&D engagement with logic/foundry customers continue to be very strong, and we are confident the transition to gate-all-around will drive a significant further increase in our served markets with a continued leading position for ASM in ALD.
Next, memory. Even though memory is becoming a more sizable part of our business, it is still a relatively smaller part of our total revenue. We are on track for very good -- or very strong growth in this segment in 2022. This reflects the success of our newly introduced applications, in particular with high-k metal gate in high-performance DRAM and ALD gap-fill in higher spec 3D NAND devices. As just mentioned, the slowdown in end markets such as PCs and smartphones has impacted the memory segment in particular.
To address the market slowdown, some of our customers have announced substantial CapEx cuts. As a result, for next year, a meaningful double-digit drop in memory spending is likely. While we expect continued benefit from our new application wins, the weaker market conditions are also likely to result in somewhat slower ramp of new and most advanced capacity, and this will also have an impact on the demand we are projecting for 2023. We are confident that based on current R&D engagements, we have solid opportunities in front of us to further expand our memory position as our customers move to next generations of DRAM and 3D NAND in the coming years.
Finally, trailing edge. Our presence in this part of the market is mainly limited to a number of niche positions, especially with our vertical furnace and epi tools in the segments of power, analog and wafer manufacturers. While much smaller than our leading-edge business, we have been recording very solid demand in this niche segment in the recent periods. Apart from the growing market demand, a meaningful part of this growth is also driven by the success of our newly introduced products. In vertical furnace, we continue to have a good traction with our 200-millimeter platform, A400 DUO and with our new 300-millimeter system, SONORA, that we launched last year, we have gained quite a few new positions.
In Q2, we already booked multiple tool orders from several customers. With our Intrepid ESA epitaxy tool that we introduced last year, we have also won multiple new customers. For instance, in 300-millimeter power and wafer, for which we expect an increased sales contribution in the coming quarters. In the third quarter, demand in the total power, analog and wafer markets remain very strong for us, especially for automotive-related capacity, but recently, we noticed some signs of weakening for demand related to consumer applications.
Looking beyond 2023 at the longer-term trends, ASM continues to be well positioned for continued solid growth. Structural growth in data-intensive end product applications such as in cloud and AI will require continued innovation towards faster and more power-efficient semiconductor devices. Our ALD and Epi technologies will play an increasingly important role to help our customers address the challenge of 3D structures and new materials in next-generation logic/foundry and memory devices.
Finally, with LPE, we are adding a new growth driver to our portfolio. As Paul mentioned, we closed the acquisition earlier this month. LPE is experiencing strong demand for the silicon carbide epi tools as customers continue to expand capacity or a large part driven by the growing electric vehicle market. Supported by a substantial backlog, LPE is on track for revenue in excess of EUR 100 million in 2023, as we have communicated earlier. LPE also has strong R&D engagements for 200-millimeter tools with several of the leading silicon carbide device manufacturers, which we expect to further strengthen our position in the silicon carbide epi market in the coming years.
To sum up, ASM is on track for a solid performance in 2022. For 2023, WFE is expected to weaken with especially memory down, but ASM is well positioned, thanks to strong exposure to leading-edge logic/foundry and solid traction in new application and products, while prospects for the longer term continues to be strong.
With that, we have finished our introduction. Let's now move on to the Q&A.
We'd like to ask you to please limit your questions to not more than 2 at a time, so that everyone has a chance to ask a question. Okay, Razia. We are ready for the first question.
[Operator Instructions] The first question comes from the line of Stephane Houri from ODDO.
Yes. Actually, I have indeed 2 questions. The first one is about the impact of the U.S. restrictions and the quantification that you've made. Can you please help us understand why you seem to be a bit more impacted than ASML, for instance, while you're not a U.S. company. So is it a question of IP of number of employees working in the U.S. Can you please help us clarify this point? And I have a follow-up.
So as we have communicated, we are, let's say, impacted by the new U.S. regulations that came out or that were announced October 7. And the regulations are actually very much broad-based this time. And we have assessed the regulations. And to be perfectly honest, we are still in the process of doing further assessment and also getting clarification. It's a very huge regulation many, many pages, and we are coming to it. What we have seen or what we understand so far is that in terms of products or technology, there is really no change for us, not much. It's -- basically it's the same as the previous regulation more or less. However, the new regulation has the additional requirement of U.S. persons. And U.S. person, the way that it is defined is very broad. And of course, for our company, we are much more a global company geographically dispersed. We have a substantial presence in the U.S. But at the same time, I think what's really important is that we have executives that are U.S. -- classified U.S. persons.
What we have done really is take kind of like a worst-case scenario and say, look, okay, for some of the advanced fabs, because it really impacts the advance, what is a classified advanced fabs in China is to say that, okay, for the advanced fabs, let's take the assumption that we will not be able to continue shipping or selling to them. And with that, we have taken a decision that we want to make the necessary changes at this moment in Q3. So that, of course, impacts to some extent, our Q4 revenue. But at the same time, for the Q3 results, we have look at the so-called orders that we have received from these advanced fab customers, including from previous quarters and not just from Q3, and we have reversed them out from the backlog that we have. So that's actually what we have done.
Now again, maybe a little bit of a clarification here. We have mentioned that sales in China has grown to more than 10% of our total. And on this call, we wanted to give you a little bit more color. So for the first 9 months of this year, sales of China was actually about 16%. And of that 16%, if the regulation had come out earlier, we would have been impacted with about 40% of the sales. And if you look at that, you can probably do the math and say, look, it's a single-digit percentage that we are impacted. And that is what we have done in terms of making sure that -- or in terms of putting in place, taking a very prudent approach and say, look, let's take this out. And because going forward, there is a high possibility or there is a possibility that we may not be able to ship there. I think that answers your question?
Yes, a little bit. The 16% multiplied by 40%, it makes like 7%, I guess. So that's what you're talking about. Yes. Okay. So the question here is, if demand is so strong in the rest of the business, like in the leading edge with TSMC, Samsung, is it possible that some of the tools that you were supposed to sell to China would be redirected to TSMC, Samsung or Intel or any other that would be taking the tools as the lead times are long enough?
The quick answer, Stephane, would be, yes. But we have to be sure. And as I said earlier, we are still in some areas, clarifying with the U.S. government. So until we are very sure, it's also a little bit premature for us to start moving things around. At the same time, most of the tools that we sell kind of customized for customers. So it's not really a plug and play. I mean, of course, we can take some of the components and move them along and so on. And once we have a clear definition or clarification, that's probably what we will do. But I think you will see more of the impact starting from next quarter, if we do this.
We have the next question coming from the line of Francois Bouvignies from UBS.
Great. So my first question is maybe looking at 2023, and you mentioned the wafer fab equipment spend that will be likely down. Now if I look at 2022, you're going to significantly outperform the wafer fab equipment by more than 20 percentage points. If you look at your guidance versus the current wafer fab equipment spend from a growth perspective year-over-year. Now if I look a bit beyond 2023, you mentioned in your presentation, we have, yes, of course potentially high exposure to logic, which is going to be less down potentially than memory. You have the ALD exposure with the node transition. You mentioned the below 7 nanometers of share going up to 45% from the 2020 adoption of high-k metal gate in DRAM, ALD gap-fill in 3D NAND. So all of this, I would assume will continue in 2023. So my question is the outperformance that you saw in 2022, is there any reason why you wouldn't outperform the wafer fab equipment again meaningfully into next year, given all the drivers that I just mentioned that you mentioned in the release? That's my first question.
Okay. Sure. I think this year, we are very confident that, as you correctly mentioned, outperforming the WFE market. And of course, 2023 is still left to be seen a little bit early for us to maybe give guidance on what we expect. I mean we already have been reading all kinds of third-party data research companies, analyst reports, and it looks like there's going to be quite some reduction in 2023. From our point of view, we continue to benefit from resilient, advanced or leading-edge logic and foundry. As we have explained before, the investments at the most advanced nodes are multiyear. So I think that's going to continue. So that's going to be good for us because that's also the largest part of our revenue.
Memory, of course, we do see weakness as with everybody else. So we do expect it to be down. And finally, when we look at the power analog wafer manufacturers part of the market, we expect that the demand there will continue to be good. As far as we can see, that is probably going to happen in 2023. In terms of contextualizing that and coming up with a number, I think it's still too early, but we see good prospects for us going into 2023. Now beyond 2023, we remain confident that the [Technical Difficulty] role in the markets that we play in, especially in the ALD market, and in the epitaxy market will continue to grow just because of the technology inflections.
We have seen and have a lot of customer engagements in the logic/foundry space. So we are not sure, but we can guess that probably the transition to gate-all-around will happen in 2024, or will start to happen in 2024, and that's going to lead to increasing usage of ALD and epitaxy. So on the whole, we do believe that what we have shown at our Investor Day last year, that still -- there's no change. And we -- if there's any further, let's say, updates, we will provide them in the future.
Okay. I mean just the -- what you mentioned, it's ASMI or the wafer fab equipment spend, memory down, et cetera. Did you talk about the wafer fab equipment or just ASMI?
Just wafer fab equipment in general. Yes.
Okay. Because irrespective, whatever, if it's EUR 70 billion, EUR 60 billion, whatever, whatever happens to the wafer fab equipment spend, is it fair to assume an outperformance meaningful, again, because of the drivers you mentioned? Just relative to wafer fab equipment.
I think it's difficult for us to say if at this moment to talk about outperformance. I think first of all, we need to have the best clearer view of what WFE, for example, is going to be in 2023. And our opinion is it's still a little bit too early. Things are still moving. It's still not finalized. But we do remain confident that we have a solid position in the leading-edge logic and foundry and also with the strong demand in the trailing edge, in the power, analog and wafer manufacturers and together with solid backlog going into 2023, that's going to cushion us very well.
Okay. And maybe my follow-up quick one really. It's on the China exposure. Can you maybe give more color if it's more memory-driven or logic/foundry, just give more color on that?
Sure. So we have actually made a lot of progress in China in the sense that we have a broad base of customers. So we, for example, sell to the logic customers, the memory customers and, of course, the trailing edge, power, analog and the wafer customers. And what has come out from the U.S. regulations is what is mainly targeted is 2 things: One is advanced fabs, which is actually just logic or foundry that is 14-nanometer and below and DRAM, 18-nanometer and below and 3D NAND, 128 layers and above. They are not really the most advanced, but they are considered advanced by China standards. We do sell to these customers. In fact, if you look at the advanced fab category, we probably have between 5 to 10 customers. We will not come out with the specific number.
So when that area has restrictions, we, of course, will be impacted. But again, I would like to say that at this moment, we have taken a very prudent and conservative view while we work through all the clarifications and discussions to make sure that we comply with the rules. But we have taken kind of like a worst case at this moment.
The next question is coming from the line of Didier Scemama from Bank of America.
My question is regarding your backlog. So you've got about EUR 1.5 billion backlog at the end of Q3. Curious to have your thoughts on what bookings might do in Q4? And then the other question related to the backlog is, can you give us a sense of the maturity profile of that backlog? How much of that is expected to be recognized over the next 6 to 12 months? And I've got a follow-up.
So Didier, first answer to your first question, of course. So again, the backlog of EUR 1.5 billion is for delivery within the next 12 months. So in that sense, you could say that recognition is within the next 12 months, a rough way of looking at it. And when you look at the Q4 bookings, so of course, we have had a couple of quarters very strong. And we do see that also with a little bit of the slowing market, various impacts and so on. We normally do not give guidance for bookings anymore. But we think that, okay, for this one time, maybe go to give some color. We do expect that going forward, especially starting from this quarter, that the book-to-bill is going to normalize, become more normal and that we will be able to catch up on converting more, I would say, of our backlog. Hopefully, the supply chain situation also gets better as we move into '23.
Excellent. And my follow-up is on the back of the comment that you made on China being above average profitability. So maybe, Paul, if you could quantify the impact on the gross margins going forward. Does that change your long-term model, but more importantly, does that have an impact in Q4 and the following quarters? And then related to that, as effectively 40% of your business in China is disappeared overnight. Are you taking actions also when it comes to OpEx? Are you taking those OpEx out of the model?
Yes. Didier, as we already stated I think in the press release and also just in the remarks that the margins we make on some parts of our sales in China that are impacted are above average. So strong contribution to group profitability. So from that point of view, you know that the short term -- the biggest driver of margin is mix. So this obviously is not favorable to our mix. So we'll have some impact most likely in Q4 and beyond. I'm not going to quantify, but you can with the numbers we've given you take certain assumptions. Obviously, at 60% of revenue, it's -- around 40% of that revenue is impacted and that with somewhat higher margins than we see normally for the group, so you can do certain simulations certainly.
Then in terms of OpEx, at this stage, maybe first, R&D, we are not planning to make any adjustments there downwards only upwards. I mean, as you know, there's a lot of opportunities ahead of us. There's quite a few inflections ahead of us that we want to stay ahead. So we will continue to invest in R&D. That's a lifeline that's very important. So that will not stop. That will actually increase. For SG&A, you've seen also quite a significant increase in the last few quarters where we needed to step up given the growth of the company and also prepare of course, for ongoing growth, that increase will slow down a lot. So we will definitely be more frugal in terms of SG&A costs. I don't expect any major restructuring or so at all, to be very honest. But again, all that is too early to tell. We have to see how revenue will develop. But the key thing is that for now, R&D will continue to increase. And SG&A, we will mitigate for sure, the increase that you've seen in the previous quarters.
Okay. That's brilliant. And maybe just one tiny one. I think given the sort of surprise today by the market of your China exposure and the impact on the restrictions, I mean, would you consider changing the disclosure perhaps going forward, so disclosing what China is about on your revenues and more importantly, perhaps because you're the only really semicap not giving that detail giving us the split between foundry/logic, memory and perhaps analog power and wafers because I think that would really help the market better understand the risks and oversee the opportunities of the business.
I think what we would like to do is take that under consideration. We actually will think about it. And part of the problem is if we give too much color, it also gives too much a lot of information to our competition. And that has always been one of the reasons or main reason why we are not doing that. So we will take that under consideration, but I cannot promise you that we will do that.
The next question is coming from the line of Janardan Menon from Jefferies.
Just on this preliminary assessment, can you let us know roughly how long it will take you to come to a final assessment? And is that mainly the procedure for that? Is it just discussions and clarifications with U.S. government officials and until you get the right answer or the correct answer from them. You will continue with this preliminary assessment. And if you do come to that conclusion of a final assessment, will you let us know whether the assessment is either continuing to be our current one or is it changes in any shape or form?
And the second question is just on the order outlook. You said that you expect book-to-bill to normalize. I assume that you mean it will trend towards 1. You are at about EUR 670 million right now, your revenue guidance is in the low 600s. So does that assume that you're sort of looking at a flattish order profile in coming quarters? Is that what we should be modeling? Or is it that with the component shortage easing and you're converting more of your backlog, your sales will rise and that would also sort of add to that normalized picture on your order book?
Janardan, on the first part of the assessment, so maybe just to give again a little bit more explanation. We are in the process of seeking clarification, for example, with the authorities. We are also -- or we have also engaged external counsel, legal counsel to help us understand the regulations and so on. How fast or how slow this will take it's hard to predict because we need clarification on certain things. And hopefully, we get them much earlier than later. But our intention, of course, is to speed this up as much as we can, so that we have clarity. And again, to a large extent, most of our peers are also in a similar situation, trying to seek a further clarification. Some of them have already made certain assessments and perhaps even announce, but some of them are still in the process as well. So again, no, let's say, a definitive kind of answer on when we can do that, but the plan is we want to do this as soon as possible, so that we don't hold things up.
On the Q4 order, let's say, description, I think [Technical Difficulty]
[Operator Instructions] Yes, please continue.
Janardan, are you still on the line? I'm sorry, we got cut off.
Yes. I'm on the line, and we had the answer to the first question, but not the second question on the [indiscernible].
So on the bookings side, I think the -- the main thing is when you -- when we were asked, for example, we try to give a little bit more color and saying that Q4 is going to probably normalize. I think there's a couple of things there that we should also take into consideration. Janardan, one is we do hope that supply chain conditions are going to get better. I think we do see a moderate improvement. But in certain areas, there are still certain pockets of certain stuff that is quite restricted. We hope that, that becomes better. Second thing is with a slightly slowing kind of a market, we do also expect that the longer, let's say, or the early order or early placement of orders, that is going to slow down significantly. So that is why we kind of are predicting or projecting that it's going to be normalized towards, as you correctly mentioned it, Unity or 1:1 kind of ratio as we go forward.
The next question is coming from the line of Tammy Qiu from Berenberg.
So Benjamin, first one. Can I just clarify because of I understand historically, a lot of your R&D and IP was developed in Phoenix in the U.S. So from a technology or a technology ownership perspective, should we actually look at ASMI as the U.S. company instead of a European company? That's the first one. And the second one is, can you talk a little bit about your traction with 3-nanometer? I understand that 3-nanometer at one of the large Asian country player has a couple of versions with different designs. So can you talk about your involvement in different design, i.e., are you more involved in certain designs but not so much with the others? And I have a small follow-up.
So maybe a little bit of how ASM is organized. Of course, we do a significant or substantial what you call the product development in Phoenix. In fact, we have products that are designed and developed there. But at the same time, we have products that are also designed and developed here in the Netherlands, designed and developed in Japan and designed and developed in Korea. So we are kind of a geographically dispersed and all over the place. So it's difficult for us to kind of classify we -- the U.S. company, a European company, I guess the best term that we would like to use is we are a company that is listed on the [ benevolent ] of the Dutch Stock Exchange, but we are really a global company. So in that sense, our IP is developed all over the world. So I hope that answers your question.
On the 3-nanometer foundry, okay, without going into, for example, any kind of customer specifics. Of course, they are working on, what you call, different versions. The good thing is we are involved with them. We have all the different versions, #1. And at the same time, we are heavily involved with them, actually also on the next and the next, next nodes. So I would like to maybe just add that in terms of R&D engagements that we have with all the logic and foundry customers, we have a significant amount of R&D engagements at this moment, both whether it's a 3-nanometer or the next node or the next, next node. I think it's probably fair even to say that we have probably the highest amount of R&D engagements that we have ever seen in our company.
Okay. Just to clarify relating to the IP and global preference cost, take it to, let's say, part of example. Would you say the contribution from U.S. in [ policy ] is above 25%.
Are you talking about the technical content?
Yes, yes. I mean, from a contribution, IP contribution project, yes.
I think the easiest way to understand that is that we, of course, have to follow the -- what is called de minimis rule. And most of our products are not affected by that because we do not reach that level. And hence, prior to the October 7 regulations that we could, and we have shared with everybody, we were able to sell and ship our products freely. Now with the new regulation, there is one which is kind of a technical, let's say, regulation. But even with that new technical regulation, it has almost no impact on that. So actually, it doesn't change. The impact on us today is more the U.S. person requirement, and that's where we are seeking a lot of clarification today.
Okay. A tiny last one, I promise. So from a Q4 perspective, given you are very conservative. Can we see actually in Q4, when you're reporting in January or February to say, actually, I was able to ship those tools, which I would cut off today. But actually, I have done the paperwork and I could actually ship it. Can we see that potentially?
Tammy, I think that's difficult for us to answer at this stage. As I said, we are still assessing the situation. There is a possibility, but I would prefer not to speculate at this one.
The next question is coming from the line of Sandeep Deshpande from JPMorgan.
Yes. Some of these questions have been asked, but I'm trying to understand your exposure going forward from here, how should we be looking at now that China has been derisked from your numbers? How should we be looking at your memory and logic exposure going forward from here, excluding China?
Sandeep, I think the -- probably the easiest way to look at it is the -- our exposure to, for example, what is the advanced fabs, which is advanced logic/foundry in the China context and memory. I would say that it is still a relatively smaller part of our business. So we continue to have a leading position, especially in the leading-edge logic and foundry, which is where by and far, a larger part of our business. And at the same time, I think we have carved out a nice position for ourselves or increased our position in memory outside of China. Unfortunately, of course, we are going to see a memory CapEx reduction in next year, but we'll see how that plays out. At this moment, we think that as far as we are concerned because of the recent application win, the impact will be there, but maybe not so big.
Okay. And then how do you look at your lead times coming in, given that now the supply is normalizing. So do you expect that to have an impact on orders as well? Were customers ordering because they expected a lengthening of your lead times and now with lead times coming in, they reduce orders because of that?
Sandeep, as I kind of alluded earlier, I think the so-called excessive maybe to some extent, early ordering, I think that's probably going to be reduced going forward. Now as far as lead times coming down, I would maybe exercise a little bit of caution. Like I said, we still have certain parts of the supply chain that is severely constrained and we are still working through that. So it's like lead times back to normal. The answer is no. We are still seeing extend the lead time. But hopefully, over the next couple of quarters, where we get to a more normal situation and that we can get back to our usual lead times as well. When that happens, I think you'll see a much more normalized kind of order revenue type of pattern.
The next question is coming from the line of Adithya Metuku from Credit Suisse.
Yes. 2 questions, please. So can you -- I was just wondering, would it be possible for you to change the configuration of your employees so that your shipments are not impacted by this U.S. person's rule. So can you move people around so that the teams that are shipping have more European and nation based employees? Is this a possibility? And if it is, how long might it take you to install this configuration? And then I've got a follow-up.
Adi, I think the answer to that is it's something that we probably will have to look at if our worst understanding of the regulation stands. And at this moment, I think our primary focus or most urgent focus is to try to understand the full definition of U.S. person. And how this impacts any -- not just us, but any of our peers or any equipment supplier as well. And then once we are able to fully -- have a full understanding of that, if it's still necessary, the answer is we'll probably have to find a way that we can change the configuration of our employees. The short answer is that's something that we will have to look at. It's probably possible.
Got it. And my follow-up is just on your exposure to your domestic customers ramping very quickly this year. Is it -- would it be fair to say that your domestic Chinese customers are using more ALD than other memory and logic vendors in non-Chinese memory and logic vendors in their recipes. And is this the reason why your exposures have grown very quickly this year? And secondly, I just wondered if you look at the exposures to the domestic Chinese customers, would it be fair to say that it's mainly ALD? Or are there other products which are also affected by this POC rule changes?
Okay. Sorry, Adi, maybe just to complete, you wanted us to kind of a contrast domestic, let's say, China customers against non-Chinese customers? Is that what you're asking for?
Yes. So for example, if I were to take like the large Korean memory guys and liquid their NAND products, would they be using CVD for certain steps whilst the Chinese vendors of these NAND products would be using ALD for the same steps, and that is why your exposure to domestic Chinese customers has been growing strongly, stronger than your group revenue. Would that be a fair assumption?
Actually, I do believe that the reason why we have been growing our positions, for example, with what is classified as advanced logic or memory with the domestic China customers. It's twofold. One is they have been trying to move up, of course, the technology chain as well. So they started with grow much, let's say, older technology, and they have since tried to move up. And with the move towards smaller nodes, more advanced technology, that has caused them to require, I would say, more layers of ALD and that is not something which is unusual from what we have seen with all of our other customers. So that's one.
Second, I think if you ask us, is our exposure mainly in ALD, I would say that it's a mixture. We do have, of course, with the more advanced fab customers, more ALD. But at the same time, again, just to emphasize, that part of the business for us in China is out of 40% of 16%. So it's not really a major big exposure for us. And the other part of our business in China, which is more than 50% is in the power analog and the wafer manufacturers. And that's not the ALD. That's mainly vertical furnace and epitaxy.
The next question is coming from the line of Rob Sanders from DB.
I just had a question about ALD market share. So [Technical Difficulty] call that they're taking share in ALD and logic/foundry. Yes, last time, I remember, within logic/foundry, you have a very dominant position in the front end of line, so the gate stack. So is it more likely that they would be winning share in more mature applications? Or is it really feasible that they may have entered your domain, your home territory, if you want?
And my second question is regarding pushouts. We haven't -- you haven't discussed whether you've seen shipment date adjustments for tools in the backlog like other deposition and etch players have talked about. So have you seen that yet? I mean, as you know, your largest logic customer is facing big demand challenges and technology challenges and memory CapEx cuts seem to be ring-fencing EV but not ALD. So have you seen pushouts so far?
Rob, I'm really sorry, but halfway to your question, I got cut off. Could you please repeat the question again?
Okay. And I apologize to everyone on the line. So yes, the first question was regarding Lam taking share in ALD and logic/foundry. Is it possible that they could have taken share within the most advanced applications within logic/foundry? Or is it more mature applications? And the second question was regarding pushouts. Have you seen any shipment date adjustments for tools already in the backlog like other players have?
Rob, thanks a lot. I think the competition with our peer, and of course, we respect and we compete together with them in all areas, actually, not just in logic and foundry, but as in memory. And I think we are competing in all the most advanced technologies as well. I think it's difficult for us to be able to give a clear picture as to whether they are gaining share or whether we are losing share or whether we are gaining share. I think we still have to wait hopefully until the year-end. And then we have a 12-month kind of cycle where we can also do our own assessment and look at some validation from the additional research company. But I do believe that we -- based on the engagements that we have, we are in a very good position to maintain our share. And of course, in memory, it's not just with high-k metal gate, but with -- and ALD gap-fill, but we have, as I've always explained a pipeline of applications that we are working on. So I think we -- there, we have confidence that we are in a good position.
On the pushout, it would be, of course, the one area where the industry is having some stress, of course, is in memory. And we are in discussions with some on certain pushouts. I would say not major, but it's just maybe a delayed acceptance of tools and so on. And we do have some of that, yes.
The next question is coming from the line of Timm Melander from Redburn.
So I had a few little questions, please. The first, just in your China business, just broadly speaking, power analog and the wafer manufacturers sort of proportionately how sizable would they be within that China business, please?
The power analog and wafer part of the business, I would say it's slightly more than 50% of our total business in China.
Okay. Then in terms of the debooking activity, does that mean that you would expect to return customer deposits in 4Q?
We unfortunately did not have any kind of luxury of getting deposits from our customers. So we are not -- we don't have to return anything. We just have to kind of take them out of the backlog. That's about it.
Got it. And then just maybe 2 other quick questions. In terms of -- and maybe this is for you and Paul, just looking at 4Q and into early '23, do you anticipate any changes in your reserving against inventory values? Is there anything that you've already baked into your gross margin guidance? I think, Paul, you discussed that the margin would have some headwinds because China was higher margin in terms of mix. Is there any element of inventory reserving that you've booked into your expectations?
At this moment in time, no special or additional inventory, let's say, reserves that we've taken beyond what we normally have, let's say, there's always a little bit of inventory, of course, that one way or the other will be impacted. Obviously, our inventory is significantly higher than last year due to all the supply chain issues that we have faced due to all advanced booking that we've done.
Of course, with changes in demand now with China, let's say, excluded for a certain part, as we talked about, maybe we have some pushouts left and right in memory [indiscernible] will seems not very big here for the moment at least. There could be some. Based on initial assess we've done, I don't expect any material changes here, at this moment in time. But of course, with a higher inventory that, of course, always some high risk. But at this point in time, it's not anticipated that we will see a significant change or a material one-off in that respect. It's not expected for now based on everything that we've done so far.
I'm afraid we are running out of time. So we have to move on, I'm really sorry. Operator, can we move on to the final question.
We are going to take the next question from the line of Michael Roeg from Degroof Petercam.
I have a question on the technology of the product that you can no longer ship. And by giving an example of ASML, the EUV immersion tool can do 28 nanometers, but also 10 nanometers? So you could not ship it to a mature node customer because it could also be used for leading-edge nodes. Is this the same with your tools that you can no longer ship to China?
Michael, I think for us, of course, there are certain, let's say, customers, China customers that are classified as advanced fabs. And it's actually very complicated. So we need to -- there is a classification or definition of what is meant by advanced technology. And we also need to look at, for example, if they are buying for drilling technology, is it in the same facility and stuff like that. So it's a little bit complicated. It's also complicated by the U.S. person, which is probably the most difficult to seek clarity. So that's where we are today, and we are still trying to seek further clarification, especially on the U.S. person requirement.
And maybe just to add to try to make it as simple as possible. Basically, the tools, the technology, the equipment, I mean, so the tools in itself basically are barely impacted because we don't meet this 25% de minimis rule. So what has impacted as Benjamin has stated before is broadening with U.S. persons. That is what is now really hurting us and that we need to clarify. So that's the key point.
Okay. That's clear. Can I squeeze in the second question?
Yes, please.
Okay. Based on the numbers you've provided over the first 9 months of the year, you basically sold about EUR 14 million per quarter for the equipment that is no longer allowed to ship. Had there been no restrictions would you have been able to guide for sales of EUR 640 million to EUR 670 million? Or is that too much for the supply chain?
I think if you just assume the same kind of just extrapolate that is not an unreasonable assumption.
Okay. Well, let's hope that your final assessment will be -- make that possible. That's it.
I would now like to hand over the conference to the CEO for any final remarks. Please go ahead, sir.
I would like to thank you all for your attendance today. And of course, also on behalf of Paul and Victor. We hope to meet many of you in upcoming conferences and other investor events. Thank you once again, and stay safe, and goodbye.
This concludes today's conference call. Thank you for participating. You may now disconnect your lines.