ASM International NV

AEX:ASM

Earnings Call Analysis

Company Maintains Growth Amid Economic Headwinds

In a time of economic uncertainty, with major economies showing sluggish growth and soft market conditions, the company stands resilient. They continue to prioritize R&D, planning to invest a high-single digit to low-double digit percentage of sales from 2023 to 2027. The operating margin target remains at 26% to 31%. Capital expenditures are set to be between EUR 100 million to EUR 180 million annually until 2027 to support R&D expansion specifically in the U.S., Korea, and potentially Europe. For the fourth quarter, the company forecasts revenue between EUR 600 million to EUR 640 million, indicating stable sales when compared to the third quarter. The second half's revenue is expected to be around 10% lower than the first half. For the full year, a revenue growth of nearly 10% is anticipated.

Investment in Research & Development Remains Paramount

The company emphasizes the critical nature of R&D investments, with plans to allocate a significant portion of sales—ranging from high-single to low-double digit percentages—towards R&D from 2023 to 2027. This strategic commitment is designed to fuel innovation and maintain a competitive edge in technology development.

Financial Outlook Amid Economic Headwinds

Despite a challenging global economic environment characterized by sluggish growth, rising interest rates, and geopolitical tensions, the company has maintained a robust performance. There's cautious optimism with parts of the market showing signs of stability, although the full scope of the recovery remains uncertain. Some customers have scaled back on capital expenditures, reflective of the broader industry trend of reduced spending in response to market conditions.

Guidance Suggests Resilience and Growth

For the fourth quarter, the company projects revenues to be stable at EUR 600 million to EUR 640 million, signaling tenacity amidst market volatility. This forecast positions the second half's revenues to be around 10% lower than the first half, which is marginally better than previous estimates. Encouragingly, full-year revenue is anticipated to grow by close to 10%, evidencing the company's ability to navigate through uncertain economic times.

Capital Expenditure and Margins

Capital expenditures are targeted between EUR 100 million to EUR 180 million annually from 2014 to 2027, highlighting the company's long-term commitment to growth and efficiency. The goal to maintain operating margins between 26% to 31% reflects a balance between investing for future growth and profitability.

Perspectives on 2024 Momentum and Market Conditions

The company is cautiously optimistic for 2024, especially in the logic and foundry space, with leading-edge customers expected to follow their investment roadmaps. However, the outlook for mature node investments and the memory sector remains hazy, likely starting the year slow. The power analog and wafer market is experiencing a slowdown, the duration and impact of which are yet to be seen. Nevertheless, the company continues to receive strong orders from the automotive and industrial sectors, indicating sustained demand in specific segments.

Navigating the Gate-All-Around Transition and China's Market Impact

The transition to the gate-all-around node is anticipated to propel high-volume manufacturing in 2025, with the company prepping for deliveries in 2024. The outcome will depend on how quickly customers can integrate and optimize the new pilot lines. Meanwhile, the company refrains from providing specific sales exposure for China due to competitive reasons, yet acknowledges the region's significant revenue contribution this year.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM International Third Quarter 2023 Earnings Call. [Operator Instructions]At this time, I would like to turn the conference over to Mr. Victor Bareno, Investor Relations. Please go ahead, sir.

[Victor Bareño, executive]

Thank you, operator. Good afternoon, and welcome, everyone, to our third quarter earnings call.I'm joined here today by our CEO, Benjamin Loh; and our CFO, Paul Verhagen. ASM issued its third quarter 2023 results yesterday evening 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.As always, we remind you that this conference call may contain information relating to ASM's future business and results in addition to historical information. For more information on risk factors related to such forward-looking statements, please refer to our company's press releases, reports and financial statements, which are also available on our website.Please further note that reference in this call to profitability numbers will be primarily on a normalized basis. Details of the acquisition-related PPA expenses can be found in the press release and in the investor presentation.And with that, I'll now hand the call over to Benjamin Loh, CEO of ASM.

[Gek Lim Loh, executive]

Thank you, Victor, and thanks to everyone for attending our third quarter 2023 results conference call.Before I start, I would like to thank all investors and other stakeholders who participated in our Investor Day last month. It was great to see many of you in person in London and even many more on the webcast. The agenda for today's call is as usual. Paul will first review our third quarter financial results. I will continue with a discussion of the market trends and the outlook, followed by Q&A.

[Paul Verhagen, executive]

Thank you, Benjamin, and thanks also, everyone, for joining the call.Yes, in the third quarter of this year, our revenue amounted to EUR 622 million at constant currencies, up 9% compared to the third quarter of last year and down 6% from the second quarter. Revenue in the quarter was top end of our guidance of EUR 580 million to EUR 620 million. Spares and services had again a solid quarter with growth of 18% at constant currencies, supported by a healthy increase in our outcome-based services. Equipment revenue in the third quarter increased 8% year-on-year, also at constant currencies. By customer segment, revenue in the third quarter was led by foundry, followed by logic and then to our analog in memory, both sequentially and year-on-year logic decreased somewhat, while foundry was up. Memory sales were sharply down compared to Q2 and especially compared to the record high level in Q3 of last year. Power analog was somewhat lower in the third quarter.Looking at growth in the first 9 months of '23, our company's performance has been pretty resilient. Our fastest-growing segment was the combined power analog and wafer segment, with sales more than doubling in the first 9 months. This is, of course, in part driven by the consolidation effect of LPE, our silicon carbide Epi business. However, also on an organic basis compared to a lower base level in 2022, our power analog wafer business delivered a very substantial growth year-to-date, and this was for a big part driven by Chinese customers.The logic/foundry markets, which is our largest business, had slightly higher sales in the first 9 months. This was the balance of, on the one hand, a decrease in leading-edge logic/foundry sales, albeit relatively resilient. And on the other hand, significantly higher sales in the mature logic/foundry, which was, in turn, mainly driven by the Chinese market. To complete the 9-month overview, our memory sales were down more than 40% year-to-date. And this compares to the relatively strong level last year, including the first substantial contribution from our ALD gap-fill inroads with 3D NAND customers in that year.Moving on now to the gross margin. In the third quarter, gross margin came in at 48.9%, about unchanged compared to the second quarter and up from 48.1% in the third quarter of '22. This increase continued to be supported by a relatively strong mix, including, again, significantly higher sales from China. SG&A expenses increased 6% year-on-year and 4% compared to the second quarter, focused on mainly cost control, particularly in view of current slower market situation. The fact that SG&A showed a little uptick compared to Q2 is mainly explained by higher variable expenses as full year performance is estimated to be somewhat better than we had previously targeted. Net R&D expenses increased by 70% year-on-year, driven by continued growth in our pipeline of opportunities.The operating profit margin dropped by 1 percentage point to 25.3% in Q3, a slightly higher revenue and gross margin were offset by increased R&D spending. For the full year 2023, we now expect an operating margin of at least 26%, which is marginally better compared to the previous guidance of 26% or slightly lower. Below the operating line results included a currency translation gain of EUR 3 million in Q3 compared to a gain of EUR 8 million in Q2 and a gain of EUR 25 million in Q3 of last year. Normalized investments -- normalized results from investments, which reflects a 25% share of the net earnings from ASMPT, decreased to EUR 0.4 million in the third quarter, down from EUR 9 million in Q2 and down from EUR 20 million in the third quarter of last year. ASMPT results were impacted by the continued downturn in the back-end equipment market.If we then turn to ASM's orders intake, we have net orders of EUR 627 million in the third quarter. At constant currencies, this was virtually flat year-on-year and an increase of 31% compared to the second quarter. In terms of breakdown by customer segment, foundry was the largest segment in the third quarter, followed by memory and then logic. Combined logic/foundry, memory and power analog also reported higher bookings compared to the second quarter. Combined logic/foundry bookings represented more than half of total and were positively impacted in the third quarter by part of the gate-all-around related orders that were previously expected in Q4 and now already booked in Q3. Memory orders increased both year-on-year and compared to the second quarter and were predominantly driven by DRAM. Power analog bookings dropped year-on-year, but were still at a solid level.Now turning to the balance sheet. We ended the quarter with EUR 547 million in cash, up from EUR 490 million in the previous quarter. We generated solid free cash flow of EUR 120 million -- EUR 112 million in the quarter. Days of working capital increased slightly to 68 days, up from 66 days at the end of June. In the current market downturn, there is some increased pressure on working capital. But so far, we have been able to manage this reasonably well illustrated by the strong free cash flow of slightly over EUR 350 million in the first 9 months of this year.We spent EUR 59 million on CapEx during Q3, up from EUR 44 million in the second quarter, and this included the amount spent from the purchase of a plot of land in Scottsdale, Arizona, primarily meant for the future consolidation and expansion of our R&D activities in the U.S. And for the full year 2023, we are still targeting CapEx in the range of EUR 150 million to EUR 200 million. We spent EUR 51 million on share buybacks during the third quarter. And on September 19, we completed the EUR 100 million buyback program that we started last April. Combined with the dividends paid earlier this year, we returned a total of $225 million in cash to our shareholders this year.In terms of capital allocation, we reiterated the principles of a policy during our Investor Day last month. Key priority continues to be investing in growth, and that means invest in R&D, CapEx and opportunistically in M&A. In addition, we want to maintain a strong balance sheet with an unchanged cash target of at least EUR 600 million. We will also continue our policy to pay sustainable dividends and excess cash will be returned to shareholders through share buybacks.At our recent Investor Day, as most of you know, we also updated our financial targets for '25, and we introduced targets for 2027. Let me briefly repeat the main points. For 2025, we increased the revenue range to EUR 3 billion to EUR 3.6 billion, up from the range of EUR 2.8 billion to EUR 3.4 billion that we still targeted in the 2021 Investor Day. For 2027, we're targeting further growth in the revenue range to a range of EUR 4 billion to EUR 5 billion, implying a CAGR of 11% to 16% in the 5-year period till 2027. The target range for gross margin remains unchanged at 46% to 50%, and operating leverage in our gross margin is limited and fluctuations within this range, both up and down and mainly driven by changes in mix.SG&A is still targeted to be a high single-digit percentage of sales. Currently, SG&A is at a higher level due to investments we made in the last couple of years to strengthen the organization and due to current softer revenue development. In future years, we expect relative SG&A to decrease once revenue growth accelerates again. R&D investment is our lifeline, and will remain at a high-single digit to low-double digit percentage of sales in the period '23 to '27. And in the first part of this period, more towards the higher end of this range. Operating margin target is also maintained at 26% to 31%. We have an upward trend in the outer years, mainly because of operating leverage in the SG&A line.Last point, we set a target for annual CapEx of EUR 100 million to EUR 180 million for the period 2014 to '27, and this compares to EUR 150 million to EUR 200 million for 2023, as I just mentioned, and is up from the previous, let's say, guidance of EUR 60 million to EUR 100 million from the '21 Investor Day. The reason for the structural increase is mainly the need to expand our R&D infrastructure. I already mentioned our planned execution in the U.S., a planned expansion in the U.S. I mean. And next to that, we announced earlier this year the construction of a new innovation center in Korea, and we are also considering expansion of our R&D activities in Europe. In terms of manufacturing, we expect to have the capacity in place to deliver on our 2027 revenue targets, following the recent completion of the second manufacturing floor on our Singapore facility and the announced expansion in Korea.And with that, I hand the call back to Benjamin.

[Gek Lim Loh, executive]

Thank you, Paul.Let's now look in more detail at the trends in our markets. We delivered a robust performance in the third quarter, even though market conditions continue to be soft. Growth in the major economies continues to be sluggish, and the economic outlook for next year is still uncertain on the back of higher interest rates, worries about consumer spending and geopolitical tensions. Parts of the end markets appear to be approaching the bottom of the cycle based on stabilizing demand and gradual improvements in inventories. But it is too early to tell what the exact timing and strength of the recovery is going to be. Against the backdrop of economic uncertainty and softer end market trends, many of the customers have reduced their capital spending budgets and slow down capacity expansion.In logic/foundry, leading-edge spending is relatively resilient compared to bigger cuts in memory, but also lower due to the impact of pushouts that we already reported with our first quarter results. These pushouts are in part related to delays in the readiness of a few new fabs and for another part, explained by end market weakness. This has been offset by significant growth from a lower base in 2022 in the mature logic foundry business for the largest part in China.As we discussed in previous quarters, following the U.S. export controls in October last year, we have seen that several Chinese customers redirected their investments to more mature nodes. And even though our play with those nodes is not as strong as in the more advanced nodes, we still have some applications and exposure in more mature logic/foundry and that business is significantly higher this year. Despite the softer current market conditions, on the positive side, our leading logic foundry customer has continued to execute to their technology road maps. We still expect that our customers will start to move to the gate-all-around node into high-volume manufacturing in 2025. As discussed on previous occasions, we expect get-all-around to drive further share of wallet gains for ASM in both our ALD and Epi business.Power analog wafer is a segment that is driving most of the growth for us this year. As Paul just mentioned, sales in this segment more than doubled year-to-date. In part, this is driven by the consolidation of LPE, silicon carbide demand continues to be very strong. Sales are on track for more than EUR 130 million in 2023, in line with our earlier forecast. In the third quarter, we booked multiple tool orders for high-volume manufacturing from the new leading customer that we announced last quarter. R&D engagements with other potential new customers are also progressing well. But also in our existing silicon power, analog and wafer business, revenue growth continued to be very robust in the third quarter. In this segment, we are primarily active with our vertical furnaces and part of our Epi portfolio.Next to strong market demand, we have also been benefiting from very good momentum with our new product introductions, in particular, our Intrepid ESA Epi tool and SONORA, our new 300-millimeter furnace platform. The advantages of these new products have not only allowed us to strengthen our position with existing customers, but also to win several new power analog customers, particularly in the Chinese market. For the full year 2023, we expect our vertical furnace product line to be the fastest-growing product line for us. Consumer-related applications in power analog already started to slow down earlier this year. But so far, that was more than offset by very strong demand in the automotive and industrial space. Recently, we have also seen some signals that point to some digestion in the coming quarters with customers in automotive and industrial, mostly outside of China and excluding silicon carbide.In memory, market conditions continue to be tough. The industry is still facing overcapacity, which means that customers will first need to see a more substantial recovery in end markets before they are likely to commit to significant new capacity expansions. A bright spot is the demand for high-performance DRAM, particularly related to AI and the transition to DDR5. This is positive for ASM as high-k metal gate ALD is a key technology for this high-performance DRAM devices. Related volumes are, however, relatively limited and not enough to offset the significant drop in the overall memory market.Let me briefly comment on the new U.S. export control measures that were announced last week. Based on our preliminary assessment, we do not expect any material additional impact relative to what we have already previously communicated.Next, our guidance. For the fourth quarter, we expect revenue of EUR 600 million to EUR 640 million at constant currencies. At the midpoint, this implies stable sales compared to the third quarter. Including fourth quarter guidance, we now expect our second half revenue to be approximately 10% lower compared to the first half, and this is marginally better than our previous guidance of a decrease of 10% or more. For the full year, we expect revenue to increase by close to 10%, including the consolidation of LPE. Compared to the WFE market, which is now expected to decrease by a high-single digit to low-double digit percentage this year, we still expect to outperform. Looking at 2024, it is still too early to comment.Looking at the longer term, the outlook continues to be strong for ASM. Paul already recapped the financial targets that we issued at our Investor Day in September, based on which ASM remains on the path of healthy double-digit growth in the coming 5 years. Despite the current slowdown, we believe the semiconductor markets continue to offer attractive growth driven by digitalization and new applications such as in AI. This, in turn, will fuel the demand for ever faster and more power-efficient semiconductor devices.The next-generation device technologies will increasingly require new 3D structures and the introduction of new materials, which, for a meaningful part, will be enabled by ALD and Epi. The transition to gate-all-around in logic/foundry, in particular, will be an important inflection. We shared with the market that this inflection will drive a USD 400 million increase in our SAM or serve available market per 100,000 wafer starts capacity. Logic/foundry spending on gate-all-around nodes is expected to grow to some USD 50 billion by 2027 or more than 40% of total WFE.In the Investor Day, we also highlighted 3 new key ALD applications such as metal ALD in particular, molybdenum that will replace conventional tungsten and copper deposition steps in the coming technology nodes. Selective ALD is another high growth area when ASM has specific strengths. Advanced gap-fill also represents a substantial opportunity and ASM is well placed, thanks to our work on advanced plasma source technology. We expect ALD to remain one of the fastest-growing market segments with an expected CAGR of 10% to 14% in the coming 5 years.In silicon Epi, we are still aiming for further market share increases to at least 30%, especially in the leading-edge part of the silicon Epi market, which is expected to grow with a CAGR of 10% to 15% in the 5-year period until 2027. In vertical furnaces and PECVD, we continue our selective growth strategy. And with silicon carbide Epi, we have added a highly synergistic and high-growth business. To make sure we are going to capture these long-term opportunities, we continue to invest in our people, in innovation and in manufacturing. In our Investor Day, we also highlighted our focus on sustainability, including our net 0 2035 target that has recently been verified by SBTi and our initiatives to improve the energy and resource efficiency of our products.With that, we have finished our introduction. Let's now move on to the 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 has 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]

Congratulations on a strong quarter, Ben. I mean, a question I have is clearly now '23 ASM is doing better than the overall industry. But how do you see '24 developing at this point given that the challenges that you talked about still remain? Clearly, I mean, ASM has offsets to those challenges because of the ramp-up of gate-all-around. But I'm trying to understand how you are -- I mean, in your mind, thinking of '24, clearly, I don't -- I'm not expecting you to guide as such. But I mean, in terms of how you're thinking of it at this point? And I have one quick follow-up.

[Gek Lim Loh, executive]

Sandeep, thank you very much. You are correct. It's difficult to provide any kind of guidance for 2024. But perhaps a couple of points of what we are seeing. I think if you look at 2024, we do expect that for example, in the logic and foundry space, that our customers, especially on the leading edge that they continue to invest according to their road map. In other words, the pilot lines for gate-all-around and it seems like every one of them is on track as they have announced to go into high-volume manufacturing in 2025.Now on the, let's say, mature nodes and for logic and foundry, I think we will have to see how the investments play out. I mean we have seen for the last couple of years, very strong investments in China. I think it's a little bit too early to give any color whether that is going to continue or whether that is sustainable. I think it's a little bit too early.In the memory sector, we have not seen really significant recovery in end market demand that is going to tell us that there will be recovery in terms of investments by our customers. So my guess is that probably we're going to start the year off slow as what we have seen in the last couple of years. In the power analog and wafer part of the market, I think as we shared in the prepared remarks, we're seeing a little bit of a slowdown, maybe a digestion. Is this going to be temporarily a digestion that's going to be quick? I think that's still left to be seen.But just to reiterate that even though we see a little bit of a slowdown also in the automotive and industrial area, we are not seeing things falling of a cliff. And actually, in Q3, we still had strong orders coming in from that sector. So that's just 3 of the things that we have seen so far. And overall, it's just a little bit too early for us to give any color on 2024.

[Sandeep Deshpande, analyst]

I mean one follow-up on that would be -- I mean, clearly, you're seeing the -- you've indicated also on the release that you are going to see the orders in the fourth quarter associated with gate-all-around for the pilot lines. I guess a couple of customers will be rolling out pilot lines. But I mean, typically, pilot lines will be 3,000 to 5,000 wafers. So the question is, will that order intake you see in Q4 continue in next year given that there may be a time between the pilot lines ramping up and then the production starting, as you know, the leading-edge companies who use the 2 nanometers where your technology is going into will probably ramp up much more '26 than in '25. So can you talk about how you see the dynamics of that?

[Gek Lim Loh, executive]

So I think it's still too early. So maybe let's just take a look at the pilot lines that are being put in place. We will deliver a lot of the equipment in 2024. And I think the move towards high-volume manufacturing is dependent primarily on 2 factors. One is the speed at which our customers are able to get the pilot line integrated, working up to a yield that they are happy with before they move on to a high-volume manufacturing. But at the same time, I think it's also heavily dependent on their customers or our customers' customers on when they would like to adopt that.Now of course, there is also a possibility that high-volume manufacturing may actually end up in 2026. But that is not what we are hearing and what we are hearing and which has been reaffirmed by all 3 players is that they are on track to go into high-volume manufacturing in 2025. And we have no reason to think otherwise at this stage.

[Operator]

The next question is from Francois Bouvignies with UBS.

[Francois-Xavier Bouvignies, analyst]

So Ben, you talked about that China being a driver this year and is not certain what's going to happen next year? Obviously, you mentioned that China was 16% of revenues in 2022. Could you update maybe this number this year? I mean, many of your peers are disclosing China exposure you did in the past. So it would be interesting to know how much China is as a percentage of your revenues today, at least year-to-date or by the end of the year?

[Gek Lim Loh, executive]

Sure. Last year, we kind of gave a number that year-to-date 9 months, China was 16% of our sales. And this was despite our policy that we don't really give sales breakdown by country, but we did that last year in light of the export controls that were announced in October. Going forward, we do not want to continue giving, let's say, individual country exposure. And the reason for that is we have a fairly narrow portfolio of products. And for competitive reasons, we do not want to disclose this. But suffice to say that as we have repeated a couple of times in the prepared remarks and also during the Investor Day, we are seeing significantly higher sales this year coming in from China.

[Francois-Xavier Bouvignies, analyst]

Okay. And maybe on the orders. So you mentioned that you have some gate-all-around part of the bookings are in Q3. So I mean I would simply imagine that what you are supposed to do in Q4 is a bit more in Q3 now. So how should we think about the orders in Q4 and because of this effect of early orders? And is China a big contributor of the orders as well?

[Gek Lim Loh, executive]

Okay. I think maybe some clarification. So yes, we did see some of the expected gate-all-around orders, especially on the -- that were expected in Q4. They ended up in Q3. There was no, let's say, motivation or any kind of intention that our customers were pulling in and so on because the deliveries all remain the same. It just happens that the orders came in at the end of Q3, so we have to book them. We cannot book that. So that is one. I think when you look at the fourth quarter type of orders, of course, we are not going to provide significant guidance, except to say that as we have guided previously, fourth quarter orders will still be higher than the second quarter, but lower than the first quarter.

[Francois-Xavier Bouvignies, analyst]

Okay. And China? China orders?

[Gek Lim Loh, executive]

We do expect a continuing orders coming in from China. And I would say, besides the power analog part of the market, we think that order flow will still continue in the mature logic and foundry nodes. And that's actually been driving up a lot of the business for us, for China this year.

[Operator]

The next question is from Tammy Qiu with Berenberg.

[Tammy Qiu, analyst]

So firstly, is that possible for you to share, if you exclude the gate-all-around related orders in Q3? Is your order actually lower or higher than Q2 as a ballpark number? And secondly, from a China demand space, and previously, you've been saying that you've been shipping a lot to right range of Chinese customers in general. Do you keep seeing that list of customers expanding or that was basically reaching a status quo there?

[Gek Lim Loh, executive]

Sure. Tammy, thanks for the question. So I don't think we are going to provide any, let's say, comparison as to if we did not have the gate-all-around orders dropping in Q3, was it below. But suffice to say that as we have communicated previously, what was expected in Q4 for gate-all-around orders were meaningful orders for us. And it's just a part of it now due to are just timing came in early, and we have to book them. We still expect order on track to receive the remaining part of the forecasted orders this quarter in the fourth quarter.Wide range of customers, yes, I think we do sell to a wide range of customers in the mature node or mature logic and foundry customers, the power analog customers. And I think to some extent, our customer base has expanded because we also now sell to quite a number of silicon carbide Epi customers that in the past, we were not really selling to. So the answer is yes, we are seeing our customer base in China expanding.

[Operator]

The next question is from Sara Russo with Bernstein.

[Sara Russo, analyst]

So really strong orders this quarter, and we saw sort of a stabilization in the backlog at about EUR 1.4 billion. Do you expect that this is a more sustainable stabilization? Or as we've heard in the past, do we expect we'll continue to see the backlog return more to where it's been in the past, closer to just over 1x or 1.5x a quarter worth of revenue versus where it's been sitting at just over 2?

[Gek Lim Loh, executive]

I think this is still left to be seen. We had, I would say, as you call it, a relatively strong quarter in terms of orders for the third quarter. And I think we saw strength in almost all segments, not just logic and foundry, but even in memory, which was primarily driven by DRAM applications that is due to a high-performance DRAM kind of requirement. And the power analog segment for us, even though it is not as high as what it used to be before, it was still relatively strong.Now going forward, again, not to give any guidance as far as Q4 is concerned and also especially given the lack of visibility as far as 2024 is concerned, it's difficult for us to tell whether the EUR 1.4 billion backlog is a normalized level. What we can probably say is that if you look at lead times, lead times are continuing to be around 6 months. We will not get back to the all 3 to 4 months when we were much smaller. So lead times will continue to be between 5 to 6 months. And if you look at that, it sounds like that is a fairly reasonable amount.

[Sara Russo, analyst]

Great. That was going to be my next question. So I'll ask you one about SG&A and R&D instead. So this quarter, we saw an increase around SG&A -- R&D as a share of revenue. And you talked about lots of hiring going on sort of support longer-term plans. How -- we've seen from your peers they've slowed hiring a little bit just given the soft market conditions. Can you just talk a little bit about how you're thinking about hiring and things as we go into might be -- what might be a flattish year for WFE in 2024?

[Gek Lim Loh, executive]

Yes, of course. Thanks for the question. So difference between SG&A and R&D, I would say. For SG&A, definitely, we are hiring a significantly less than we used to do very, very specifically, we might still hire for specific areas where we need some personnel, which is very, very limited. So cost control there has definitely increased and has a lot of focus today and will continue. For R&D, it's different. We still see so many opportunities. We still don't even have all the people that we would like to have, to be honest. So there, we will still continue to hire, although we do realize that next year, as Verhagen said, it's a little bit uncertain. It's too early to tell how this will develop. But we still believe that given the amount of opportunities that we have that we should continue to invest in R&D to support our, let's say, medium to longer-term value creation opportunities.

[Operator]

The next question is from Janardan Menon with Jefferies.

[Janardan Menon, analyst]

So just -- I'm just trying to get an idea of how the next couple of years pans out for you, and I know you don't want to provide any guidance. But one of your peers at ASML, basically was suggesting that will be flat in 2024 for them, and then they will see a very strong increase in 2025. Given what you're saying about '24 and you have a EUR 3.3 billion midpoint of guidance for 2025 and that you're seeing various areas of strength and weakness into 2024 as you responded to Sandeep's question, would it be fair to say that it's going to be lower growth or whether it's up/down or sideways is going to be lower in 2024? And then you would also similarly expect a very strong pickup into 2025 based on your current 2025 guidance and what you're seeing from your customers?

[Gek Lim Loh, executive]

Janardan, thank you for the questions. Like I said, I think it's too early to say or provide even any specifics. I think 2024 is still quite uncertain and the visibility is still not there. You could perhaps say that look, from an overall WFE point of view, the first half should be lower than the second half. So the recovery is going to be back-end loaded or second half loaded. But I think we still need to see end markets and how they recover before we have a better idea, okay, how much investments are going into leading-edge logic/foundry, for example, and also for memory, et cetera. At this moment, I think it's kind of difficult to call. I think as far as 2025, we do have a very, I would say, a significant target. And we are actually, at this moment, all we can say is that we are confident that we will be within that range of EUR 3 billion to EUR 3.6 billion when we get to 2025.

[Operator]

Next question is from Nigel van Putten with Morgan Stanley.

[Nigel van Putten, analyst]

Not a question on the order intake because you do seem to -- you're willing to provide some forward-looking guidance into analog power being a little bit weaker going forward. Maybe other way around, I think DRAM unexpectedly strong in the order book. Is that something you see that was more of a one-off in the third quarter? Or is that something that you can see strength continuing into the fourth and maybe next year considering end markets aren't really pointing that way? That's the first question.

[Gek Lim Loh, executive]

Nigel, thanks. I think as far as DRAM is concerned, yes, we did see stronger orders in the third quarter. And as we kind of explained, this was driven by investments into high-performance DRAM. And we all know that generative AI requires that a lot of other applications need faster and more power-efficient DRAM. I think that's what's been driving that. Now going forward, is this trend going to continue? Again, I think you will go back to what would be the end markets going to ask for. I mean if generative continues to just grow and grow, of course, I think you will need to have a much more high-bandwidth memory. At this moment, we don't have that visibility, but we have been happy to get a chunk of DRAM orders in the third quarter, and we will see how the end markets recover and play out over the next couple of quarters.

[Nigel van Putten, analyst]

Got it. And then a question about the spares and services revenue, very strong results in the quarter. I'm not mistaken, maybe in a record quarter. Elsewhere looking at lower service revenue pretty much across the board due to lower utilization. So how come were you able to report such a strong result? Was that due to some growth in the past couple of years and those tools coming off of warranty? Or is there another specific reason for that strength?

[Gek Lim Loh, executive]

Sure. I think what we have been doing as far as spares and services, of course, there's 2 factors that's driving growth for us. One is the expanding installed base, of course, which means that we have more machines or more tools in the field and hence, more a bigger base that we can tap into for revenue purpose. The second one, of course, is what we have been doing or pushing for the last, I would say, 3 years or so, which is outcome-based services. I think what we are seeing, which is I do not know whether this is actually a record growth quarter for us, but it was -- we grew 18%, which was a high number. And I think we are just seeing that the fruits of what we have been doing is now playing out. Of course, the industry may have lower utilization, et cetera. But you still need a fair amount of servicing that needs to go into the tools. And I think that's what's been driving that.

[Operator]

The next question is from Simon Coles with Barclays.

[Simon Coles, analyst]

Just on the orders numbers. Thank you for giving some color on 4Q, but it's quite a big range. So I'm just wondering if you could give any color on whether we should be thinking it more like 1Q or is more like 2Q? That will be the first question. And then linked to that is really you're saying China is very, very strong, but has China been helping the orders right now? Or is China driving the revenues at the moment that they're not changing in the mix of orders right now?

[Gek Lim Loh, executive]

Sure, Simon. Thanks for the questions. I think it's easier for me to answer the second question first. So when you look at China, it has been fairly consistent for us this year in both -- in terms of both order intake and also in terms of revenue. And we just want to reiterate again that we do see, even though it's a lesser part or less exposure for us in the mature logic/foundry nodes, but we do still have a play there. And we are getting quite some, let's say, benefit from that. Plus, when you look at the power analog and wafer segment, which just a recap of what Paul has mentioned in his prepared remarks, we basically saw a doubling compared to last year in the first 9 months.And of course, if we add on something that was new that was not there really in 2022, which is silicon carbide Epitaxy, we have a fairly significant increase as far as China is concerned. And I think China will continue to be resilient going forward. Of course, the question on whether China is going to continue to grow at the kind of breakneck pace that they have been doing for the last 2, 3 years, I think that's still hard to predict. But we do see that China will continue to be, let's say, investing and could be beneficial for us. But how much, that's difficult to predict.Now the orders in Q4, again, not to -- again, you're correct, the range is pretty big. I think the way to think about this is the one, we do expect still resilient orders from power and analog. We do expect to remain to get the remaining of the first gate-all-around orders coming in. Some of them happen to just drop into Q3, but the best are on track and forecasted for Q4. And we do expect also that mature nodes logic and foundry, especially coming from China will also be resilient. And we, again, finally expect that silicon carbide orders should be strong for us.

[Simon Coles, analyst]

That's very helpful. Can I just follow up on the China revenues? Should we still be assuming that it's the 15% to 25% of China revenues, that's the headwind in 2024, right in terms of export control?

[Gek Lim Loh, executive]

Well, that was the estimate that we could give at the point in time when the export controls first came out. And again, suffice to say that we do expect our China revenues because of the continued investments in China in various segments of WFE to be significantly higher compared to 2022.

[Operator]

The next question is from Robert Sanders with Deutsche Bank.

[Robert Sanders, analyst]

Yes. I just wanted to compare March, April when you saw a pushout from logic/foundry and today, it sounds like you haven't seen another logic/foundry pushout. Is that the case? It's just -- obviously, we're all just comparing what ASML has seen and what you have seen. And of course, that's probably a function of lead time and what's in the backlog. But can you just confirm that you haven't seen any incremental pushouts since April?

[Gek Lim Loh, executive]

Rob, thanks. I think pretty much what we messaged or guided during our first quarter earnings call. That's what's been -- or that's what has happened.

[Robert Sanders, analyst]

Got it. And I guess it doesn't concern you that what ASML has seen, which may be a function of them over ordering for long lead time tools. So therefore, it doesn't necessarily mean that you're about to see a push out. I guess that's configured.

[Gek Lim Loh, executive]

I think what our peer is perhaps messaging is a little bit different. And especially if you consider that they have very, very significantly longer lead times. Our lead times are not as long. So we -- for example, if we get impacted, we get impacted much faster. But at the same time, we, in the short term, have also, let's say, the visibility because our lead times are on the average today about 6 months, they have lead times that are much longer. So maybe it's a different way of looking at it.

[Robert Sanders, analyst]

Got it. And just a quick question on the buyback. You said you completed the buyback. Where are you at with the next buyback? When should we hear some news on that?

[Gek Lim Loh, executive]

Good question. That will most likely be -- if we will do a buyback, we announced with the full year results, but we have not made any decision on that yet. It depends on a lot of things as you can imagine. So -- but if anything to be done, we will announce that with the full year results, Rob.

[Operator]

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

[Timm Schulze-Melander, analyst]

Benjamin, first question just on the gate-all-around orders, the development tools and the pilot line that you were expecting in the second half of this year. Just what proportion, can you give us some color what proportion you booked in Q3? Was it more than half of that total? And then I had a follow-up.

[Gek Lim Loh, executive]

Sure. So we -- as you correctly mentioned, Timm, we do expect -- or we were forecasting, whether it's development tools or whether it's a pilot line, get a lot of orders. And some of them that were -- for the pilot line got dropped into Q3. So I think if you were to look at that in that sense, it's been fairly constant between the third and what will be probably for the fourth quarter.

[Timm Schulze-Melander, analyst]

Okay. That's really helpful. And then maybe I just had a follow-up on Nigel's question around the aftermarket and that strength there because it is so much better than other people are seeing. And you talked about the strength in outcome-based service revenues. Can you maybe just give a little bit more color kind of how that keeps generating revenues where your customer is seeing lower utilization rates and maybe lower production volumes, just how the outcome-based services revenues, how mechanically do they stay elevated in that kind of backdrop?

[Gek Lim Loh, executive]

Sure. So maybe just a quick explanation of outcome-based services is essentially a way where we get our customers to enter into a longer-term arrangement contract with us, where we actually take over a lot of the, for example, cleaning, making sure that parts are ready, et cetera, et cetera, we do that on behalf of them. And the way that we try to do this is to enter into multiple year contracts with them. But at the end of the day, the customers have to see the value before they commit to that.I think one of the things that maybe I forgot to emphasize is, we came from a relatively low level. I think we have always guided that prior to perhaps 2020, we were more focused on just transactional services and spare parts. But since 2020, we have tried to push this along. And I think that's been helping because you have customers that are in longer-term contracts review. Now of course, utilization may impact that. But at the same time, if you come from a lower base, I think there's more room to increase. And I think that's what we -- part of what we are seeing at this moment.

[Operator]

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

[Didier Scemama, analyst]

On '24, I'm going to give it a go, even though you don't want to answer. I wondered in the flat WFE environment you're talking about for next year, if memory WFE were to be the outperforming subsegments or versus foundry/logic, mature nodes, et cetera. Do you think you can still outperform WFE? And then I've got a quick follow-up.

[Gek Lim Loh, executive]

Didier, thanks. I think that question is a little bit difficult to give you a clear answer. But what I would like to add, of course, is that if you look at memory, we have, over the last couple of years, continued to increase our presence. And we have, in our opinion, increased market share in both DRAM with high-k metal gate, with ALD gap-fill in 3D NAND. And as shared by our CTO during the Investor Day, we are working on a lot of new applications for both for DRAM and also for 3D NAND. And we do expect that some of these new applications will get adopted as we go forward.So if you have, for example, in 2024, a year where, let's, as you call it, the memory growth outperforming logic/foundry and so on, which basically translates to, in my opinion, quite some meaningful or substantial investment in new technology, new nodes for memory and for -- I mean for DRAM and for 3D NAND, we will continue to increase our presence and market share there. But how this reflects or it finally ends up in comparison to whether we can outperform WFE. I think it's still too early to say. It's difficult. It will also depend, for example, what the other segments of WFE, how much they grow.

[Didier Scemama, analyst]

Yes, makes sense. Just wanted to come back to comments you made earlier, just making sure I understood. I think you said the weakness in the mature node power analog is coming from non-China automotive and industrial customers, is that correct?

[Gek Lim Loh, executive]

Especially on the power analog side, I would say China is still relatively strong, robust. But we do see that outside of China for especially power and analog, we see slowing down. Again, just to clarify, we are not saying that it's falling off a cliff. But for quite some time, in the power analog set outside of China, we had really seen weaknesses especially for consumer applications. But this has more or less been compensated by strength in automotive and industrial. And right now, we are seeing that automotive is also slowing down.

[Didier Scemama, analyst]

U.S. or Europe or both?

[Gek Lim Loh, executive]

Actually, as long as it's outside of China.

[Operator]

The next question is from David O'Connor with Exane BNP Paribas.

[David O'Connor, analyst]

Great. Maybe Benjamin, one for you first on gate-all-around. You talked about booking or expecting to put all the gate-all-around pilot orders by the end of Q4. So just wondering in the past, kind of what was the cadence of the time line between those pilot line orders and the orders for HVM? Is that typically a kind of 2-, 3-quarter time frame? And I have a follow-up for Paul.

[Gek Lim Loh, executive]

Sure. So David, I think it really varies from customer to customer. And it really depends on how fast the customer gets all the pilot line tools, install, qualify, finish our integration and get to a certain yield that they are comfortable with. That's one. Second factor, of course, is what is going to be their customers' adoption of a new node and technology. And it's very difficult to give, I would say, a standard or general numbers because it really varies from customer to customer. And I think, to a large extent, it also varies from node to node. So those are the 2 things that we have to see. And I think the 3 customers that we have, starting with pilot line or manufacturing this year, again, they have reaffirmed that they all want to go into high-volume manufacturing in 2025. That's the only schedule that we can work on.

[David O'Connor, analyst]

Okay. Got it. And maybe one for Paul on the gross margin. Paul, you talked about the very strong gross margin on particularly the China mix there. When you look at your lead times about 6 months, as you called out, how do you see that mix evolve over the next 2 quarters? I mean, based on your comments, it sounds like China is going to remain strong over the next 6 months. I mean, is that a fair takeaway from your comments on China and the read across the gross margin?

[Paul Verhagen, executive]

Yes. Thanks for the question, David. Certainly, the margin is indeed driven by good mix, but in particular also by China, you've seen it in the last 3 quarters, so that's correct. Short term, as Benjamin said, China is still doing relatively well. But at a certain moment in time, will most likely still again screw over there, but will most likely normalize. I think that I think the most reasonable assumption to have. So if China will continue to be strong for 6 months or 2 quarters, that's -- yes, I don't want to confirm that. I also don't want to deny it. It's just a little bit too early to tell. I think for the next quarter, it will still be reasonably okay. But going forward, we have to see if it stays at this, what I call elevated level or if it will normalize. And again, I would expect it to normalize at a certain moment in time, but of course, when it's hard to tell.

[Operator]

The next question is from Maarten Verbeek with the Idea.

[Maarten Verbeek, analyst]

It's Maarten Verbeek of the Idea. Firstly, you mentioned that you're working on a lot of new applications and tremendous opportunities, and I take your word for that. But then more or less, I also had anticipated that there should be some growth in evaluation tools, and that has been stable for the past couple of quarters. And actually, when you look in the past, the development of the evaluation tools has been more or less in line with your net sales development. So that has more or less decoupled. Could you give some explanation for that?

[Gek Lim Loh, executive]

Yes, I can. So indeed, you're right. You call it the eval tools, it has been relatively stable, but it's also because we have turned quite some eval tools and the turn we actually sell. So when you do a successful eval tool, typically you try to then sell that eval tool into the customer. And sometimes, that takes longer to, let's say, turn a tool. Sometimes it goes a little bit faster. But what we've seen is that we have turned actually, we plan by some new tools, but we've also turned quite a lot of tools. And I don't have a coincidence that stays flat or not. I can only say that the number of opportunities that we see and that we have and that we're working on have increased. And that's also the reason why you see the increased spending, in particular, in gross R&D, which again, this quarter was similar to last quarter, close to EUR 200 million over quarter.

[Maarten Verbeek, analyst]

Okay. And secondly, you do make some progress in your operating working capital. But actually, that has been hampered by U.S. and international as a good player paying your bills very fast, much faster than the past. Is there also a particular reason for that?

[Gek Lim Loh, executive]

No. Actually, I have discussions, similar discussions with our organization, to be honest. Now we pay our bills on time. Different still, of course, supply by supply. I think reasonably in line with industry norm. What we've seen is that on the customer side, there is a little bit more pressure by some customers to delay a little bit. That's what we mentioned also, I think, in the prepared remarks that we see some pressure on working capital. We have, again, had discussions on our own payment behavior, and we will continue to have those. But that's the current situation and will not change overnight, but I can at least confirm what I just said is that we have also had these discussions we have our particular global operations team to see if we can rebalance that.Second point is also important to note, what you call DPO days payables outstanding are expressed in days of sales, the same as basically our accounts receivable. And with our margins, of course, if you would express DPO as -- and days of cost of goods, they would more or less doubled. There's just mathematic because you may whatever close to 50% margin. So there's also that element that you have to take into account. If you look at like-for-like, the gap is not as big as you would think it is. But it's still -- we still pay a little bit quicker than, let's say, the pace in which we receive money from our customers. But it's not as big as it looks like simply because of the measurement that we use, you should actually express DPO and cost of goods and open sales, but then you cannot add it together. So that's the reason.

[Operator]

Gentlemen, there are no more questions registered at this time. And I turn the conference back to Mr. Benjamin Loh, CEO, for any closing remarks.

[Gek Lim Loh, executive]

Sure. Thank you, operator. I would like to thank you, everybody, for your attendance today, also on behalf of Paul and Victor. We hope to meet many of you in upcoming conferences and other investor events. Thank you again. Stay safe, and goodbye.

[Operator]

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