ASM International NV

AEX:ASM

Earnings Call Transcript 2021-Q4

[Operator]

Good day and thank you for standing by. Welcome to the ASM International Q4 2021 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Victor Bareno. Please go ahead.

[Victor Bareño, Director of Investor Relations]

Thank you, operator. Welcome, everyone. We're joined here today by our CEO, Benjamin Loh; and our CFO, Paul Verhagen. ASMI issued its fourth quarter 2021 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, together with our latest investor presentation.As always, we remind you that this conference call may contain information relating to ASMI's future business and results in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to our company's press releases, reports and financial statements, which are available on our website.And with that, I'll turn the call over to Benjamin Loh, President and CEO of ASMI.

[Gek Lim Loh]

Thank you, Victor, and thanks to everyone for attending our fourth quarter 2021 results conference call. I hope you and your families are all healthy and safe.Let me start with some highlights. With record high sales and bookings, ASMI delivered again a strong performance in the fourth quarter despite continued challenging supply chain conditions. For the full year, our sales increased by 34% at constant currencies, the fifth consecutive year of double-digit growth.During the year, we further strengthened ASM's position as we continue to invest in the growth of the company. The impact of the pandemic May 2021, an unprecedented year for each of us. I'm proud of our employees, and I want to thank them for their relentless commitment and for everyone's contribution to the strong results in 2021.Next, I'll briefly update you on 2 announcements. Earlier this month, we announced that Hichem M'Saad was nominated by the Supervisory Board as a third member of the Management Board, subject to shareholder approval at the upcoming AGM in May. His role as CTO includes responsibility for all products and technology. As most of you probably know, Hichem is currently our Executive VP of Global Products, and he has been a driving force behind many of our successful products in the last few years.We also announced that we set up an executive committee that will consist of the management board members and 4 other key executives. The strengthening of our governance structure follows the strong expansion of ASM in the last years and prepare our company for continued strong growth expected for the coming years.The agenda for the rest of today's call is as follows: Paul will review our fourth quarter and full year financial results. I will then continue with a discussion of the market trends and the outlook, followed by the Q&A. With that, handing over to you, Paul.

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Thank you, Benjamin. In the fourth quarter of 2021, our revenue increased to EUR 491 million. At constant currencies, this was up 11% from Q3 and 40% from the fourth quarter of 2020. Revenue came in towards the higher end of our Q4 guidance of EUR 470 million to EUR 500 million, despite tough supply chain conditions during the quarter.By customer segment, revenue was led by logic, which increased substantially compared to Q3, followed by foundry and then memory. Combined logic/foundry revenue was at a record high level in Q4.Equipment sales in Q4 increased 43% year-on-year at constant currencies, led by record high ALD sales. And growth in our spares & service business showed a solid increase of 26% year-on-year, also at constant currencies.In the fourth quarter, gross margin was 47%, slightly down from 47.2% in the third quarter and up from 45.2% in the fourth quarter of 2020. SG&A expenses were up 13% sequentially and 31% year-on-year. The increase is explained by a number of factors, including increased headcount to support growth, related to recruitment campaign costs and higher variable expenses.Net R&D expenses increased 28% sequentially and 31% year-on-year, mainly due to expansion of some of our facilities, higher head count and an increasing number of R&D projects to support growth. As a reminder, we indicated already in our Q3 earnings call that investments in SG&A and especially R&D in the first half were below our target and that we had to step up spending.In Q4, the operating profit was positively impacted by EUR 4 million in other income, which is related to a gain on the disposal of property. In total, operating results increased nearly 70% year-on-year to EUR 131 million in Q4. Below the operating line results included a currency translation gain of EUR 7 million compared to EUR 13 million in the third quarter and a loss of EUR 16 million in Q4 of 2020.As we discussed at earlier occasions, we hold the largest part of our cash in U.S. dollars, and the currency translation differences are included in our results.Let's now have a closer look at ASMPT. Normalized results from investments, which reflect our share of the net earnings from ASMPT amounted to EUR 26 million in Q4, about similar to EUR 28 million in Q3 and EUR 27 million in Q4 2020. The ASMPT reported quarterly sales of $796 million, up 44% year-on-year and above ASMPT's guidance. Q4 bookings amounted to EUR 674 million, up 25% year-on-year. And for the full year 2021, ASMPT sales increased by 49% to $2.8 billion.Now turning back to ASMI's consolidated operations. Our new orders in the fourth quarter increased strongly to EUR 645 million, up 70% year-on-year. By customer segment, bookings were led by foundry, which strongly increased compared to the third quarter to a new record high level. Second largest was logic, somewhat down versus the record high in Q3, but still very strong. Memory was third, with bookings substantially up from Q3 and mainly driven by DRAM.Let's now have a look at the full year results. At slightly over EUR 1.7 billion, net sales in 2021 increased 30% as reported and 34% at constant currencies. Equipment sales grew by 38% at constant currencies, led by strong growth in our ALD product line, which continue to account for more than half of our equipment revenue and also by very strong growth in epi. Spares & services increased by 18% at constant currencies, driven by an increased contribution from a new outcome-based services.In terms of customer segments, revenue for the full year was led by the foundry segment, followed by memory and then logic. Revenue in the combined logic/foundry segment showed a strong increase and continue to account for the larger part of our sales. Sales in the memory segment also showed a solid increase in 2021, led by DRAM. Noteworthy was also the performance in the smaller analog power and wafer maker segments. Although a smaller part of the total sales increased very strongly in 2021.Gross margin increased from 47% in 2020 to 47.9% in '21, well within the midterm target range of 46% to 50% that we provided at our Investor Day last year.For the full year, SG&A expenses increased by 20% in absolute terms and decreased as a percentage of revenue from 11.9% to 11% in 2020 to 11% -- 11.0% to be precise in 2021, benefiting from operating leverage. The absolute increase was as just mentioned, in part driven by investments across the board to further strengthen and professionalize the organization to be able to manage the continued strong top line growth.In 2022, we expect continued investments in SG&A. And as communicated during the Investor Day, looking out to 2025, we expect SG&A to gradually decrease towards a high single-digit percentage of sales.Gross R&D expenses for the full year increased by 20%. Due to an increase in capitalization and decrease in impairments, the net R&D increased at a more modest pace of 9%. As a percentage of sales, net R&D decreased from 10.5% in 2020 to 8.7% in '21.As just mentioned, the increase in R&D spending was below our targets and is lagging behind top line growth. In 2022, we aim for an acceleration in R&D spending. In the midterm, we still expect net R&D to be in the range of high single digit to low teens percentage of sales.Operating profit for the year increased strongly by 50% with the operating margin improving from 24.6% to 28.4%. Effective tax rate for the full year increased from 14.6% to 17.2%, in line with our earlier forecast of a high teens percentage. And we continue to expect that the tax will further increase to a low 20s percentage in the coming years. An important reason for this increase in the tax rate is the full utilization of earlier net operating losses, of which we benefited in prior years. Normalized net earnings increased by 70% to EUR 507 million, slightly north of EUR 0.5 billion.Now turning to the balance sheet. We ended the quarter with a solid cash position of EUR 492 million, down from EUR 525 million at the end of Q3, but up from EUR 435 million at the end of 2020.For the full year, free cash flow more than doubled to EUR 266 million compared to EUR 120 million in 2020. And the key driver behind the increase is the strong increase in profitability, and this was in part offset by the increase in cash spent on taxes of EUR 152 million in 2021.And this increase in tax payment is driven by a combination of factors. As just explained, the tax rate has increased and combined with a strong improvement in profitability, which resulted in higher taxes paid. But also in 2021, we paid cash taxes in the Netherlands for both 2019 and 2020 as well as the estimated preliminary tax for 2021. This is explained by the fact that we only moved to a taxpaying position in the Netherlands in 2019 and the Dutch government offered the possibility to postpone tax payments in 2020 due to COVID uncertainty.Then to working capital. Days of working capital increased from 55 at the end of Q3 to 58 at the end of Q4, but decreased compared to 63 days at the end of Q4 2020. Within working capital, accounts receivables went up, which is mainly explained by the fact that sales in the fourth quarter was heavily back-end loaded, mainly due to supply chain constraints within that quarter.CapEx came in at EUR 79 million and was for a large part related to the expansion and upgrading of our R&D labs, as we already mentioned in previous quarters. These investments will continue in 2022. Due to COVID, some investments were delayed and will carry over into 2022. Therefore, CapEx in 2022 will likely be towards the higher end of the range of EUR 60 million to EUR 100 million that we target for annual CapEx.In terms of shareholder remuneration, we returned EUR 237 million cash in 2021, of which EUR 140 million in share buybacks and EUR 97 million through dividends. We will propose a dividend of EUR 2.50 per share to be paid over 2021, up 25% from previous year's dividends. And in addition, we have our press release last evening, we announced a new EUR 100 million share buyback program.With that, I hand the call back over to Benjamin.

[Gek Lim Loh]

Thank you, Paul. Let's now look in more detail at the trends in our markets. 2021 was a strong year for our industry. The pandemic accelerated digitalization trends and the continuing buildout of IT infrastructure, for which semiconductors provide key building blocks. Combined with a rebound in the global economy, the semiconductor market increased by 24%, exceeding a level of $500 billion for the first half.The WFE, Wafer Fab Equipment, market increased by a mid- to high 30s percentage last year. The logic/foundry segment showed a strong increase and continue to be the key driver for our sales. Our customers added substantial capacity in the leading-edge nodes to address increasing demand in areas such as 5G smartphones and high-end computing.We also saw for the first meaningful bookings in the second half of 2021 for the upcoming node transition, which for most of our key logic/foundry customers is expected to go into high-volume manufacturing in the second half of 2022 and into 2023.Our memory sales also expanded last year, supported by healthy spending trends and further growth in our high-care applications in the DRAM segment. The growth in WFE spending on the trailing edge nodes was also worth noting in 2021. While we divide the largest part of our sales from the leading nodes, we have a number of solid positions in each markets in the trailing edge, particularly in the power, analog and wafer maker segments.Analog power demand, which has relatively higher exposure to the automotive and industrial markets, rebounded strongly in 2021 following the drop in 2020. Following the record high level in Q3, our bookings in analog power remained very strong in the Q4, which supports an expected solid revenue increase in this segment in the first half of 2022.The search in semiconductor and equipment demand has been outstripping supply and coupled with the impact of COVID, created shortages and constraints.Looking at our manufacturing capacity, we are in a relatively good spot as we already discussed in previous quarters as we have the advantage of our new and expanded manufacturing facility in Singapore that we completed at the end of 2020.Using the first manufacturing floor, we have been steadily increasing headcount and ramping output in the course of last year. We have also started work on our second manufacturing floor as announced previously, and we still expect this to be production-ready early 2023.In terms of the supply chain, conditions remained challenging in the fourth quarter, as we already projected in our last earnings call. Lockdown-related restrictions in Southeast Asia that still impacted our suppliers in Q3, eased in Q4. But at the same time, supply became tighter for certain chips and electrical components and not only for our direct suppliers but also deeper into the supply chain.In Q4, supply chain constraints again impacted our business, but we were still able to achieve record shipments with sales towards the high end of our guidance. This was thanks to, again, an excellent job of our global operations team in close collaboration with our suppliers and customers. We expect the supply chain situation to remain tight in the first half of the year.We stay focused on meeting our customers' requirements and on mitigating supply chain risks, for instance, by early ordering and by the qualification of additional suppliers. We expect our sales to further increase in both Q1 and Q2.In terms of products, 2021 was again a successful year for our ALD business. We booked very strong growth and believe we have at least maintained our leading market share. We made strong progress in R&D engagement for future nodes.Epi also showed very strong growth, thanks to increasing adoption in the advanced CMOS market and the rebound in the analog power segment. An important achievement in 2021 was the second customer win for our Intrepid ES tool in the advanced CMOS market for a gate-all-around application. We also launched the new Intrepid ESA last year, addressing 300-millimeter epi applications in the analog, power and wafer maker markets. Traction is strong, and we expect this to be another solid driver for our epi sales starting in 2022.In PECVD and vertical furnaces, our strategy is to invest selectively. Our high productivity 200-millimeter vertical furnace, the A400 DUO that we introduced in 2019 was very successful in 2021, including several new customer wins in China.Our spares & services business also delivered a strong performance with sales up 18%, as already mentioned by Paul. Key driver is the new outcome-based services that we have been developing over the last couple of years, which create value for our customers by reducing costs and increasing the uptime of our equipment. In 2021, we booked multiple contracts for our complete key management and Spares-as-a-Service offerings.Next, I would like to highlight our progress on ESG. In 2021, we accelerated our focus on sustainability. We announced our net-0 2035 target last September. And as a first step, we transitioned most of our key sites to renewable energy in 2021. People is another key focus area for us in sustainability. In 2021, we continued to prioritize health and safety. We launched our core values, we care, we innovate, we deliver; and we took further action towards the diverse and inclusive workplaces.Moving on to the outlook. ASM has started the year on a strong footing with record high order backlog. WFE spending is expected to increase this year with a mid- to high teens percentage, and we expect to outperform WFE in 2022. The strongest growth in WFE this year is expected for the logic/foundry segment, which is also underpinned by our customers' recent CapEx announcements.Next to further expansion of capacity for the current leading-edge nodes, we expect spending to increase for the upcoming logic/foundry nodes as well. In this transition, we expect a strong double-digit increase in the number of ALD layers which will drive further share of wallet gains for ASM.We also expect to further strengthen our position in the memory market this year. Previously, we talked about new ALD applications that we expect to move into production starting in 2022 and 2023. One of these applications that we also discussed in our Investor Day is ALD gapfill. We have developed strong technology to fill high aspect ratio gaps in a seamless way. In 3D NAND, this is becoming an important requirement with the transition to higher stacks. We have been making good progress and expect a first sales contribution in 2022 and increasing adoption as we progress.Longer-term prospects also remain strong. Data-intensive end market applications such as artificial intelligence and cloud computing will require faster and more power-efficient semiconductors. We have a strong position in the advanced deposition technologies that help our customers address the challenges of increased device complexity, 3D structures and new materials. The transition to gate-all-around is a key example and is expected to drive a $1.2 billion increase in the combined SAM or serve available market for our ALD and epi products by 2025. Supported by the traction in our R&D engagement, we feel confident about the growth forecast that we have provided in our Investor Day, with the ALD market expected to increase at a CAGR of 16% to 20% in the midterm and epi at a CAGR of 13% to 18%.In short, prospects are bright and ASM remains well positioned.Now let us look at the guidance that we have issued as part of our Q4 press release. Looking at the first half of the year of 2022, supply chain conditions are expected to remain tight. For Q1, on a currency comparable level, we expect revenue of between EUR 500 million to EUR 530 million with a further steady increase in Q2 revenue compared to Q1. Based on the current visibility, we expect revenue in the second half of 2022 to be higher than the level in the first half.With that, we have finished our introduction. Let's now move on to the Q&A.

[Victor Bareño, Director of Investor Relations]

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

[Operator]

[Operator Instructions] The first question comes from the line of Didier Scemama from Bank of America.

[Didier Scemama]

I've got a 2 couple of quite boring questions, frankly. Can you maybe, Paul, help us understand the underlying OpEx trajectory and certainly starting in Q4, give us the underlying R&D and SG&A, excluding the bonus payments and perhaps to be a bit more granular as to what you think is the appropriate level of aggregated OpEx, perhaps for calendar year '22?And then maybe secondly, on the top line, you clearly are very confident on the growth trajectory of the business in '22. I think it's understandably the case given the CapEx announcement of your customers. I just wondered there is a wide gap between the 40% CapEx growth guided by 2 of your key customers and the sort of WFE growth you're talking about? I just wondered if you could help us understand what calendar year '22 revenue growth could look like for ASMI if you expect specifically to materially outperform WFE or just be in line?

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Okay. I'll take the first question. I think Benjamin will take the second one. On OpEx, maybe first, looking at the fourth quarter. I think, first, look at the combined OpEx, R&D and SG&A, I think as we communicated, it is important to understand that we have stepped up investments, which is needed to support continued growth. Also this year, of course, you've seen a significant growth. So I think that in itself are logical.We see increases both in SG&A and R&D. And the key drivers for that in SG&A are actually across the board. We have stepped up investments in multiple areas, increased headcount. Of course, costs for recruitment have increased sharply given the war for talent that is ongoing. We had also indeed an increase, you referred to already in variable expenses. As you know, we accrued for that during the year, but at year-end, there's always the final reconciliation based on the actual results. So that also was, let's say, incidental that is included in these numbers.And for R&D, I think, as I said already, it's important to understand that, of course, also there, we have headcount growth. We have R&D facilities, labs, in particular, that we have been expanding. We're not done yet. And so some are further progress than others, so that will continue into 2022. And of course, the number of R&D projects given everything that's coming is also increasing. So adding that all up, gave the numbers that you've seen.Then in addition, it's important to note that there was also, let's say, a reclass, not large, of a few million from SG&A to R&D. So if this reclass would not have happened -- and again, this is just a few million, but it's still, I think, for transparency purposes good to mention. The SG&A costs would have even a little bit higher amongst others due to the incidental, like expense that I just mentioned and R&D would have been slightly lower.Then looking into next year, if you look at the R&D costs, let's say, before the reclass, so that would be a few million lower than what you see on -- in the press release. I expect the Q1 to be somewhat lower. Typically, we see some level of seasonality in the R&D expenses. But at the same time, I expect Q4 of 2022 to be higher than Q4 2021. So you will see a gradual increase throughout the year above the level where we are now. We are at 8.7% for the year. We think that's a little bit too low. So we will target, of course, to further invest in R&D.Then for SG&A, if you look at the Q4 run rate and then go a few million lower, I think that's where we will start the year with and then gradually also increase it somewhat also again to support the growth. So hopefully, this gives you enough insight to basically model the OpEx going forward.

[Gek Lim Loh]

Didier, I will answer the question regarding the top line and perhaps what you have alluded to an apparent gap between WFE and the CapEx announced. So I think, again, this year, we started the year in a very encouraging way with some of our customers announcing big CapEx increase, some as high as 30% to 40%. And when we look at some of the data research companies as far as WFE growth this year, I would say they are still probably in the mid-teens, maybe very low 20s kind of range. I think the consensus is more in the mid-teens range, and that's roughly where we are low to high teens.In terms of, I would say, what could be our revenue for the full year 2022. Of course, it's still too early. And it's also compounded by complications from a lack of visibility in some parts of the supply chain. And we, of course, would hope that supply chains recover faster, earlier, so that we can deliver more. But there is still a fact that some of these areas lack visibility. So it's kind of hard to judge. But I think this year, we have tried to give more color to the financial community. And hence, first of all, because we are announcing our Q4 results late. And during the -- these earnings, we always try to give a color on what is going to happen, not just for Q1 but a little bit of Q2 as well.But 2 other things that we have added into our guidance is to give guidance that we do think that the second half is going to be stronger than the first half. And at the same time, we have also added the guidance that we do expect to perform -- outperform WFE growth this year. We cannot quantify at this moment what 2022 will really look like given the -- a little bit of the complexity, but we are actually quite confident that it will be a strong year of growth again for ASM in 2022.

[Didier Scemama]

And just maybe one quick one. Is the normal seasonality pull with Q3 slightly down versus Q2, would you say?

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

You're referring to OpEx or?

[Didier Scemama]

No, no, top line.

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

No, I would not say that. What we see -- basically, what Benjamin said, the market is good. There is major investments announced from our customers. If anything, we should see continued to growth. That's also what we guided for, EUR 500 million to EUR 530 million with further growth in Q2 and then in H2 versus H1. And what makes it more difficult to be more precise is as Benjamin already explained, is the limited visibility in certain parts of the supply chain.

[Didier Scemama]

No, I think you've been incredibly transparent, especially given the supply challenges. So I really appreciate it.

[Operator]

It's from the line of Adithya Metuku from Credit Suisse.

[Adithya Satyanarayana Metuku, Research Analyst]

2, please. Just a follow-up on the previous question. So when you look at operating margins within your internal plans for 2022, do you expect operating margins to be at least flat in 2020 versus 2021? That's the first question.And secondly, now there's been some updates on the 3D DRAM road maps from your customers. One of your peers presented a road map showing 3D DRAM again happening in 2026 time frame and one of your customers presented a road map showing it happening in late 2020s. I just wonder whether you've gained any additional clarity in the quarter -- in the fourth quarter of last year as you went through post your Analyst Day and the time line for 3D DRAM? Any color you can provide there would be helpful.

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Let me take the first one and Ben will take the second one. On the gross margin, there's a lot of moving parts, as you know.

[Adithya Satyanarayana Metuku, Research Analyst]

Sorry, Paul, I didn't mean gross margin, I mean operating margin expansion.

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Okay. Operating margin, also good. There's even more moving parts in the operating margin. So of course, we have not guided on that. But what I can say is that we have, of course, guided for our -- during the Investor Day. For our gross margin, we have also guided for the operating margin, as you referred to. I just have given you, hopefully, a good enough granularity on OpEx, so SG&A and R&D. And hopefully, that was sufficient for you to properly model, let's say, the ongoing investments to support growth. That's 1 element. And 2, the other element, of course, is also for us, it's pretty hard still to judge what the top line will do. We are confident that it will be strong. We're confident that it will be a year of growth, strong growth again. But due to limited visibility in certain parts of the supply chain, - it's still a little bit difficult to judge what the top line will do. And of course, that will also have an impact, in particular, on the operating margin somewhat. But having said that, we expect to stay within at least our guidance as we have guided that during the Investor Day. And unfortunately, much more than that, I cannot give you at this moment.

[Gek Lim Loh]

Adi, on the 3D DRAM question, I think we are seeing perhaps increasing discussions, maybe articles on 3D DRAM. And of course, on our part, we are engaged with a couple of DRAM customers trying to figure out what exactly is the technology going to be, what they need, how can we help them? I think the -- if I could say maybe in a simple summary, I think the current status is most of our customers are looking at this, trying to figure out what is the best way to do this? How can this be done? But given that this is a major inflection, our view is that any kind of major, let's say, volume production, this is going to be from 2026 onwards, so it's still quite some time out. Nevertheless, I think because of it being a major inflection, we are starting early and we are already talking to some of the DRAM customers.

[Operator]

Next question comes from the line of Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

2 questions, if I may. Firstly, I mean, in response to an earlier question, you talked about outperforming the market. One of the big trends this year, Benjamin, is the growth in lagging-edge. And in the lagging-edge, ASM wasn't a major player. And so are you saying that the spending on lagging-edge -- growth is much lower than the spending on leading-edge in 2022, which is why you will continue to outperform the market? And then the second question I have is regarding the implementation of ALD in next-generation leading-edge processes. I mean do those shipments for high volume for gate-all-around applications start second half of this year? Or is this still further out as such?

[Gek Lim Loh]

Sandeep, thanks a lot. On the first question, if you look at, for example, what has been announced by the leading foundry at a record high CapEx, they also specifically mentioned that 70% to about 80% of their CapEx is going into the 7, 5 and 3 nanometer. And as you know, Sandeep, the leading-edge is actually where we have our biggest strength. So we are actually confident based on what we know that a large part of the WFE this year, especially in the logic/foundry area is still going into advanced nodes. And especially also in the memory part of it, a lot of the, I would say, investments that potentially will be done this year and next year will be at the next node. And that's why we have always given the guidance that we do expect some of our more advanced memory applications that we have been working on with our customers in the last couple of years, that we will see adoption sometime in '22 to '23.That's not to say that the trailing edge investment is going to be small. In fact, I think it will continue. And for us, even though we don't have, let's say, a lot of play in the trailing-edge, as we mentioned earlier, we do have positions, good positions in some niche markets with our vertical furnace that we are seeing actually a very significant growth. At the same time, when you look at epi, you could say that we play in the trailing-edge because we play not only in the advanced CMOs, but we also play in the power, analog, wafer manufacturers segment. So that is one of the reasons why we are quite confident that the overall, we see a very good growth potential for us.The second part of your question, Sandeep, I think, was next-generation logic/foundry nodes, are we seeing high-volume shipments? I think this depends on what you call next generation. I mean if you look at 3-nanometer, shipments already started, I would say, second half of last year, it's continuing. And 3-nanometer is still being ramped this year. If you look at perhaps potentially the first, let's say, gate-all-around that goes into high-volume manufacturing, I think this year, you will probably see some of this at the end of the year, but it's going to be slow volume as they ramp up, let's say, a process and yield. But overall, I think besides the capacity ramp at the leading nodes this year, we're going to see a lot of let's say, buys in terms of development for the next-generation technology. So all in all, this is adding up to, I would say, a pretty nice and healthy demand for us for the whole of 2022.

[Operator]

Next question from the line of Janardan Menon from Jefferies.

[Janardan Nedyam Menon, Equity Analyst]

When I look at your order trends and revenue trends over the last, say, 8 quarters, until around Q2 of this year, your orders and revenues were reasonably similar in magnitude. And now your revenues have been starting to lag your order profile. And with that, in the last quarter, for instance, it's come down to about 76% of your order trend is what your revenues were with, but as it was about 100% for a long time. And your backlog, obviously, as a result, is showing very sharp increases, including 151% in the last quarter. So I'm just wondering, is this entirely because of supply constraints? Or is there something else happening in your -- in the nature? Are you getting much more extended lead time orders, which is driving this trend? And how do you see that trend progress in coming quarters? Will you continue to see that divergence between orders and revenues? Or once supply constraints go away, will we get a catch-up on the revenues with your order trends? That's my first question.My second question is just talking about something like, say, a future technology introduction like, let's say, one of your customers has introduced gate-all-around already, but the others will probably introduce it in 2024. How long before that for such a critical technology will they -- will you know that you've already got the design win? Is it -- are we talking about 1 year? Does it happen 2 years before? Or does it happen even before that? And what are the kind of engagements that you have and the run-up to that, where you know that you definitely secured the win and you will get that volume in the future?

[Gek Lim Loh]

Sure, Janardan. Maybe to answer the first question and I think that's a very, I would say, a correct observation that you see our revenue lagging our orders. I would say that, of course, we do see, because of the slightly longer lead times that we have today caused by the supplier chain constraint, we do see some earlier ordering. But the volume is not like -- it's moving the needle, but we do see some of that. I think, by and large, a big part of this divergence, as you call it, between the orders and the revenue or revenue lagging orders is really due to the supply chain constraints.In other words, if we had, let's say, ideally in an ideal world, no supply chain constraint, we probably would not have such a high order backlog as well, and we will be able to deliver I would say, probably -- we don't quantify it, because we haven't done it -- a fair bit more than what we have done in Q4 and probably also going into Q1.On your second question regarding the introduction of a new technology, I can only say from a generic point of view, usually, from the time the process is frozen probably until when they really go into high-volume manufacturing, it's probably 18 months, because they first have to order the equipment and then the equipment moves in. They have to fine tune the equipment, they have to do the pilot lines and so on. So it's actually as much as I would say 12, maybe up to 18 months before high-volume manufacturing starts, where generally all the equipment is already decided.

[Janardan Nedyam Menon, Equity Analyst]

Understood. So if I understand your first answer correct, if you had no supply chain constraints and if orders stay at these levels, you would be shipping closer to EUR 600 million – EUR 650 million of revenues per quarter?

[Gek Lim Loh]

Like I said, we do not quantify that. But I know for sure, I will have less white hair. And definitely, that we will be able to do more than, for example, what we did in Q4 and what we have guided in Q1.

[Operator]

Next question comes from the line of Robert Sanders from Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

Yes, maybe just picking up on the last question. Your backlog is currently about 5 months of sales. So do you expect that the -- it sounds like you're saying that some of the orders are a function of the long lead time. So do you expect that backlog to continue to grow as we move through this year given supply constraints are still there? Or do you think that over time through this year, as supply constraints ease, people will start to order it within the smaller lead time, and you'll start to see kind of orders coming in below sales? Because presumably, if you revert back from a 5-month backlog to a 3-month backlog, your book-to-bill will have to come under one at some point, presumably by the end of this year or early next year?

[Gek Lim Loh]

Rob, thanks a lot. I think it's a function of 2, I would say, elements. One is, of course, the supply chain constraints. If this eases, of course, this is going to impact lead time. And if we can go back to the, let's say, normal lead time or shorter lead time, as we have been doing for a long time, I think we will be able to bring the backlog down.The other variable and element is it also depends on, let's say, the strength of the order intake. And at this moment, we see that orders are actually going to continue to be healthy. Just looking at what some of our customers are planning in terms of investments this year, we think that this year, order intake is still going to continue to be healthy over the course of the year.

[Robert Duncan Cobban Sanders, Director]

Got it. And you're not going to guide orders, though, going forward, right? That's what you've said. So we won't -- we will only get a view after you've already seen the orders. Is that correct?

[Gek Lim Loh]

Yes. So we have decided to stop guiding orders partially because of the volatility and -- but we will report it. So I think on our next earnings, when we do the Q1 earnings, that we will be reporting the order intake as well, besides the revenue.

[Operator]

It comes from the line of Timm Schulze-Melander from Redburn.

[Timm Nikolaus Schulze-Melander]

Just had a quick couple, please. First one, if you could just share what sort of lead times you're quoting now for ALD and epi tools and kind of how that compares to normal, which I think you referenced in the last answer? And then the second one, just on the aftermarket business. Could you maybe just talk us through a little bit about what you saw in Q4 compared to Q3 and how we should think about that developing sequentially through 2022?

[Gek Lim Loh]

Sure, Timm. On the lead time, it varies, of course, by products. And I think your specific question was what is the lead times now for ALD and epi? Even within those product lines, it varies quite a lot. But I would just generally say that our lead times are longer than what we have been used to. And what we have been used to was probably in the region of 4 months. So now it's longer than that.On the aftermarket, the spares & service business, we had a fairly significant jump in Q4. That's probably one of the reasons for your question. But the service revenue fluctuates from quarter-to-quarter. And I think in Q4, we had a good one, which ended with a fairly nice growth for us.Going forward, we do expect that -- this year, in 2021, we grew our spares & service revenue by about 18%. We do expect that going forward into 2022, we will continue to grow at a healthy pace, especially as our outcome-based services, what we call Complete Kit Management and Spares-as-a-Service, gain even further traction. We had good progress in 2021, and we do expect that 2022, we will have even further traction on those products.

[Timm Nikolaus Schulze-Melander]

Great. Can I just ask one quick follow-up on the eval tools balance. Obviously, a mixture of eval tools coming off the balance sheet as they're sold and new ones being installed at customer locations. Just given where we are at the logic/foundry, you've referenced a lot about 3-nanometer and moving into high volume. Does that -- should we expect eval tool balance maybe to play at a lower rate of order intake through 2022 as a consequence of that node transition? A comment there would be helpful.

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Thanks for the question. Looking at '22, if you compare to where we ended the year in '21, we actually expect eval tools to grow. Also, the balance sheet value will grow, but also the shipments into customers will grow. There's a lot going on. As you already mentioned yourself and Benjamin mentioned a few times. So we do expect a further growth of shipments of eval tools into 2022. On the sales and the turns, that's maybe a little bit more difficult to guide yet. There will also be sales, of course, of tools that are currently with customers. That's too early actually to guide you on that one. But at least what I can tell you is that the ingoing tools are expected to further increase.

[Operator]

It comes from the line of Stephane Houri from ODDO BHF.

[Stephane Houri, Research Analyst]

So first question would be on the gross margin because the evolution of the gross margin in 2021 has been a bit, let's say, unusual, starting very high and staying high, but slightly below the level of the start of the year. How do you see gross margin evolving throughout the year? And maybe also a comment on the average for the year?

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Thank you, Stephane, for the question. In the gross margin, I think the highest was 49.5% in Q1. And I think the low was 47.0%, so quite some fluctuations. Yes, as already mentioned a few times in prior calls, there is a lot of moving parts in the gross margin. But the most important one is mix of applications. And going forward, we will see most likely similar fluctuations, some quarters somewhat higher, and some quarters somewhat lower. For now, I prefer and I hope you appreciate not to guide on the full year margin development. It's a little bit too early for that. Of course, for sure, the target is, as I mentioned earlier, to stay in our range of 46% to 50%. But yes, ongoing fluctuations will continue to be part of our business. But the rest assured that we will try to manage the margin, of course, in the best possible manner and stay within our guidance.

[Stephane Houri, Research Analyst]

Okay. And just a quick follow-up on the epitaxy business. Can you share with us what is the size of the business currently? And if you see the net outperforming the average growth for the company this year?

[Gek Lim Loh]

Stephane, I will take that. I think we -- as we mentioned last year, I think we saw a very big growth in the epitaxy, let's say, business. A large part of that, of course, was also driven by the recovery in the power analog wafer maker market. I think that growth will continue this year into 2022 as well, not just in those segments, but also in the advanced CMOS.In terms of quantifying the market, we haven't done that yet. And we probably will want to wait until April, when we see some of the data research companies publish market size and stuff like that to see whether we are on the right track. But the market did grow fairly significantly last year. And I think going forward, if you look at the different types of applications that are going to use epi, we cannot say for sure that it is going to outgrow, let's say, the standard WFE, let's say, growth rate. But it will grow at a very high rate. And our projection, of course, as we mentioned in our Investor Day, is from 13% to 18% CAGR until 2025.

[Operator]

Next question comes from the line of Marc Hesselink from ING.

[Marc Hesselink, Research Analyst]

Yes. First question is on the R&D extra spending. What kind of horizon where you see the impact of that? I'm asking this, in the past spent you spent lot less, but you already had a very positive impact on your addressable market and the growth of the company. And so the quite significant step-up that you're making and which you also guided for at the Capital Markets Day. So what will that drive? When will we see the impact for this? Is that 1 year from now? Is it a 5-year horizon? Or I guess it's a split between it, but how can you split that up?And the second question is on the new management structure. Can you maybe explain a bit why that happen now? Is the size of the company, you've got to a certain stage that you had to change the organization? Or will you see -- are there other reasons, and you expect to see significant benefits from this changed structure?

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Yes. Let me take the first one on R&D costs. What we're doing is actually we continue, of course, to step up investments. We continue to recruit people headcount. In addition, what we have seen in the second half of the year, actually towards the end of the year is an adjustment in compensation and benefits, simply because of the war for talent. And we are not the only ones who are doing that. Competition is doing the same. It's very much possible that a similar thing will happen in 2022. So that will be one driver, of course, simply to retain people. And given the war for talent, compensation will disproportionately increase for engineers. That's one element. Two, headcount, as I said. Three, with increased facilities and, of course, increased balance sheet, depreciation will increase of the facilities that we have. The number of tools within the facilities will increase, and that also will depreciate, of course. That's also another increase. The number of projects will increase. So consumables will be higher that we use, of course, when we develop and test the product. So there is a number of things that's going on.We think it will be relatively gradual. But of course, in a quarter where you make an adjustment for instance, in compensation, or in a quarter where you adjust a variable expense because you have to accrue it based on a certain expectation and you need to either go higher or lower, yes, you can see a little bit of, let's say, breaks of the trend as you would expect then. But yes, basically, it is a continuous investment. And if it would be up to us, you would see nicely in line. But unfortunately, that's not the case. Some quarters, we will track more people than other quarters. I mean, it will move a little bit, but will be a continuous increase. As I said, Q1 is expected to start below Q4 of this year. But thereafter, we expect it to grow actually higher than Q4 of this year towards the end of the year.

[Gek Lim Loh]

Marc, on the management structure, you are very correct that it's a direct consequence of the company having grown. So just if you look at, for example, where we ended in 2021 compared to maybe 5 years ago, we basically became 3x bigger and even just comparing us to 3 years ago, we basically more than doubled. So the increasing size and complexity of the company, it was time we felt that we have somebody else join us in the management board, and that comes in the form of Hichem M'Saad.There's also another good reason why specifically we have nominated Hichem to join the Board. If you look at our Investor Day, where the strategy that we really have is growth to innovation. And even though Hichem is going to carry the title of CTO, basically, he is responsible for not just R&D, but he's response still for all the products and all the engineering within the company. And with that all focusing, all falling under his umbrella, we are actually confident that for one, we will have better speed to provide the leading-edge equipment that we have been providing to our customers over the last couple of years and at the same time, be better or, let's say, do an even better job aligning, let's say, our efforts to the road maps of the customers, because the technology inflections and changes are coming at us fast and furious. And also, this is one of the reasons why we continue to step up our spending in R&D.

[Operator]

Next question is from the line of Tammy Qiu from Berenberg.

[Tammy Qiu, Analyst]

So a quick one on for pricing. Over the past quarter, we've been hearing -- and this quarter, we've be hearing pretty much all the semiconductor guys talking about supply chain shortage. And some of the reasons I mentioned, including, for example, component shortage at their suppliers and logistic issue. I'm just wondering from your side, because of -- from my understanding, 70% of your supply chain is in Asia, and you are mainly Asian-based. So can you help us understand what exactly is the shortage? And also, at the same time, I have a question on the 3D NAND design win you got for ALD. How do you think of your position in every single 3D NAND player? Do you get design wins for every single of them or is it selectively?

[Gek Lim Loh]

Tammy, thanks a lot for the 2 questions. I don't have an exact, let's say, a proportion of our supply chain that is in Asia. But I would say that a fairly large part of our supply chain is, in fact, in the Southeast Asian region, whether the parts of the components are manufactured by, for example, U.S. or European customers, a lot of them, they do have factories in that area.In terms of what exactly is the shortage that we are seeing. So previously, we had COVID, let's say, workforce restrictions, I would say, probably in the Q2, Q3, getting better into Q4. But then we got hit now starting from, I would say, the end of Q3, with what I would call component shortages, and this is primarily in semiconductor chips. So it's not just, let's say, with our direct suppliers, but it's also with suppliers further deeper into the -- embedded into the supply chain. And I think that is right now anything that requires semiconductor chips or that requires or that is associated with semiconductor chips, I think that is where we see the biggest, let's say, shortage today.I think if I could clarify your question on 3D NAND was how -- what applications do we play in? Or what was your question regarding 3D NAND?

[Tammy Qiu, Analyst]

It's like high-k metal gates, for example, you are very strong in all the memory players. And wonder for this application, for 3D NAND, are you in all 3? Or are you in some of them?

[Gek Lim Loh]

Okay. This is -- I like this question a lot, Tammy, because I think you are very perceptive. And we did in the prepared remarks mention about making a lot of progress in gapfill ALD for higher aspect ratio structures. It's actually maybe nice to perhaps update everybody. We have been working on those for quite some time. And as we have always said, we do expect some of these applications to move into high-volume manufacturing maybe end of this year, early next year. We have, in fact, very good traction with some of the customers on gapfill applications, so much so that we do believe that some of this will be adopted for high-volume manufacturing. We cannot go into more specific details. But at this moment, we are very let's say, encouraged and very confident of our opportunities in gapfill applications for 3D NAND.

[Victor Bareño, Director of Investor Relations]

We have time for 2 more callers. Operator, can we have the next one, please?

[Operator]

Next question is from the line of Michael Roeg from Degroof Petercam.

[Michael Roeg, Analyst]

Two questions. First one for Paul. Sorry to come back on the gross margin. But based on the guidance for the full year, it looks as if your sales are going to grow by about 20% or maybe even more. And that's going to boost your utilization and that is generally always good for gross margin even for an assembly company like yourself, where operating leverage is less than with manufacturing. So everything else equal, what would 20% higher sales be for a gross margin of your company?

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Okay. I can take that. It would do something, indeed. You're right. Not a lot, to be honest. I mentioned that also during the Investor Day, given that the vast majority of our cost of goods sold is actually purchased material and components and systems. So the relative fixed cost is not very high, but it would help. So that's definitely -- would definitely be a plus.On the other hand, of course, there's a lot of moving parts in the gross margin. As I mentioned, mix is the most important one. But you see, of course, commodity prices increasing, energy prices increasing. So there's also a few offsetting movements. We add all together. Our focus is on managing a proper margin, managing value for our customer and of course, managing also, at the same time, our own margin. And our focus will be to make sure that we stay within the guided range. And of course, where possible, we'll try to improve it. But yes, it's too early, Michael, to guide for that.

[Michael Roeg, Analyst]

Okay. Fair. Then my second question, well, you already mentioned that yourself, there's a lot of cost inflation. Have you raised prices last year? And will you be raising prices this year to offset inflation?

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Of course, again, the focus for us is managing our margin, and that can be done through multiple things. On the one hand, it's indeed the mix and pricing, sales pricing. And on the other hand, is of course, managing our suppliers and becoming more efficient in our assembly and, of course, do value engineering on our products to actually make them less expensive. And that combination of things we will do. So where possible, yes, we will increase sales prices, but that's not possible everywhere, of course. Where possible, we will do some value engineering of current products, which, of course, is an ongoing process. We have also cost reduction opportunities with certain supply, not everything is going up, but certain parts are going up. And so we're trying to manage that whole mix and ultimately deliver products that, again, satisfies our margin and creates value for our customers.

[Victor Bareño, Director of Investor Relations]

Thank you, Michael. We still have a few callers in the queue, but we are running out of time, unfortunately. So we have time for 1 more question. Operator, can we please have the last question?

[Operator]

It comes from the line of Nigel Van Putten from Kempen & Co.

[Nigel van Putten, Analyst]

I have one. One of your competitors last week said they see sequential growth accelerating as the year progresses. Now if I marry that with your comments today about healthy order intake throughout the year, also talking about upcoming inflections in 3D NAND gapfill and gate-all-around, would it be fair that under the assumption of supply chain concerns gradually easing, you could see a similar pattern?

[Gek Lim Loh]

Nigel, thanks for the question. Just to confirm, your question was whether we see, for example, sequential growth accelerating?

[Nigel van Putten, Analyst]

Yes. I think you've kind of already said that there's going to be sequential growth quarter-over-quarter throughout the year. Yes, I'm just trying -- on top of that, could accelerate under given assumptions.

[Gek Lim Loh]

I think the best way to answer your question, Nigel, is when we look at, for example, the potential demand based on the plans and CapEx announcements of our customers, we do see that this year, we're going to have still growth, for example, in terms of CapEx, which is going to lead to, I would say, a nice, let's say, order intake for us. And secondly, this is maybe a little bit repeating on what was answered to Sandeep from JPMorgan. You see also a fairly substantial still, especially in the logic/foundry area investments in advanced nodes, and that's going to also be good for us as it plays to our strength.I think we will have to see as the year goes on. But our, let's say, outlook at this moment is generally positive that despite the supply chain constraints, we will be able to do a little bit more in the second quarter compared to the first quarter. And even with lack of visibility or limited visibility in some areas of the supply chain, we do expect that in the second half, things will get a little bit better and hence, also why we are already putting out in our statement that the second half will be higher than the first half.

[Operator]

Thank you. And I will now hand back over to Benjamin Loh for final remarks.

[Gek Lim Loh]

Thank you, operator. I would like to thank everybody for your attendance today, also on behalf of Paul and Victor. We do look forward to seeing many of you in our upcoming virtual investor virtuals and conferences. Thank you again. Stay safe and good bye.

[Victor Bareño, Director of Investor Relations]

Thank you. And if you didn't have the chance to ask your question, please reach out to us after the call.

[Paulus Antonius Henricus Verhagen, CFO & Member of Management Board]

Thank you.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.