ASM International NV

AEX:ASM

Earnings Call Analysis

ASM Outlines Resilient Investment and Growth Plans

In 2023, ASM witnessed solid early-year demand but saw weakening market conditions by year-end, particularly in the leading-edge logic/foundry space, which still booked additional gate-all-around (GAA) pilot line orders. Investments in innovation and readiness for forthcoming market shifts remain critical, with CapEx rising to EUR 154 million and plans to double cleanroom space in Arizona. The company expects its served available market (SAM) to grow by USD 400 million per 100,000 wafer starts with the GAA technology shift. While navigating short-term softness, ASM is well-poised for future growth in silicon carbide as the industry transitions to larger wafer sizes, and is on track to accomplish its sustainability goals, increasing the use of renewable electricity to 88% in 2023. Shareholder returns have been augmented through a new EUR 150 million share buyback program and dividend hike to EUR 2.75 per share. ASM's first-half 2024 revenue guidance is set at EUR 600-640 million per quarter, with expectations of upward trends in the second half and a revenue range forecast of EUR 3.0-3.6 billion for 2025, catalyzed by the GAA 2 nanometer technology scale-up.

Near-Term Revenue Forecast

The company sets the stage for the current fiscal year with its Q1 2024 revenue guidance expected to be in the range of EUR 600 million to EUR 640 million, hinting at stability by maintaining a similar level for Q2. Investors can also expect revenue to rise in the second half of 2024, surpassing the figures in the first half, although specific figures are yet to be determined.

Market Expansion and Revenue Growth

Despite the slower growth in broader markets, the company is tapping into smaller, yet meaningful sectors like renewable energy, which is projected to significantly bolster revenue throughout the current year.

Memory Market Uncertainties

Memory recovery remains an uncertainty, particularly within the 3D NAND segment where production cuts are still a possibility. While DRAM is expected to show gradual growth due to AI-driven demand for high-performance memory, visibility on the full recovery trajectory and consequential financial impact remains unclear.

Prospects of Memory Recovery

As anticipated, there will be an increase in the pace of memory recovery which is expected to lead to more orders for the company. The shorter lead times of the company, relative to its peers, might be advantageous, suggesting a potential for faster adaptability and responsiveness to market changes.

Ongoing Growth Momentum

After achieving a 19% growth in 2023, the company foresees a continuation of this positive growth trend into 2024, driven in part by traction in its outcome-based services. However, specific growth figures are not yet being released, leaving investors to anticipate based on the previous year's performance.

Capital Expenditure Planning and Political Considerations

Regarding capital expenditure, the company has projected a wide range for 2024 between EUR 100 million to EUR 180 million, highlighting the challenges in precise phasing of CapEx from year to year. Moreover, the company acknowledges the unpredictable nature of the political landscape, particularly with regard to China, but pledges to supply products in line with global demand and regulation compliance.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon. This is the Chorus Call conference operator.Welcome, and thank you for joining the ASM International Fourth 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. Welcome, everyone. I'm joined here today by our CEO, Benjamin Loh, and our CFO, Paul Verhagen. ASM issued its fourth quarter of 2023 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 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 note that the profitability measures mentioned in this call will be primarily based on normalized non-IFRS figures. For the reported IFRS results, please refer to the quarterly results press release.And with that, I'll turn the call over to Benjamin Loh.

[Gek Lim Loh, executive]

Thank you, Victor, and thanks to everyone for attending our fourth quarter 2023 results conference call. I'll start with a few of the highlights.ASM had another successful year. Our sales increased by 13% at constant currencies, despite the softer wafer fab equipment market conditions. This marks our 7 consecutive year of double digit growth.In the second half, we received the first meaningful orders of gate-all-around technology, which will be a significant driver for ASM. We remain on track towards our strategic target and continue to invest in innovation and expansion. I want to thank our ASM people. Their hard work and dedication contributed to our company's robust performance in 2023.The agenda for today's call is as usual. Paul will first review our financial results. I will then continue with a discussion of the market trends and outlook followed by the Q&A session.With that, handing over to you, Paul.

[Paul Verhagen, executive]

Thank you, Benjamin. And I'll will start with the fourth quarter results. So our revenue amounted to EUR 633 million in Q4, down 7% year-on-year at constant currencies. Revenue is above the midpoint of our guidance of EUR 600 million to EUR 640 million.By customer segments, equipment sales were led by foundry followed by power/analog/wafer and then memory. Combined logic/foundry decreased both year-on-year and compared to the third quarter. Softness in the leading-edge part of this segment was partially offset by continued strength in mature logic/foundry mainly in China.Despite the weakening demands, the reflective our Q3 results, sales in the power/analog/wafer segments increased to a quarterly record high as we shipped the tools related to the strong orders in this segment received earlier in 2023.Memory sales increased strongly in the fourth quarter compared to the very low level in the third quarter, mostly driven by DRAM.Gross margin of 47.9% in the fourth quarter of 2023 was up by one percentage points compared to the same period last year, but down one percentage point compared to the third quarter of 2023. The mix in the fourth quarter remained favorable, including a continued strong contribution from China sales with above average profitability.The Q4 margin was also impacted by approximately one percentage point due to a one off restructuring cost related to the further optimization of our global manufacturing footprint.Net R&D expenses increased from EUR 70 million in Q3 to EUR 79 million, reflecting a continued increase in R&D projects and also the impact from a EUR 2.5 million impairment of capitalized development costs.SG&A increased from EUR 77 million in Q3 to EUR 83 million including higher variable expenses and specific investments to further strengthen the organization cited in IT.Our new orders in the fourth quarter amounted to EUR 678 million up from the EUR 627 million in the third quarter and down to 14% compared to the fourth quarter of 2022.Logic/foundry accounted for the largest part of a Q4 orders and increased both sequentially and compared to the fourth quarter of 2022. After the first more meaningful contribution in the third quarter, gate-all-around 2 nanometer orders further increase in the fourth quarter, while demand for mature logic/foundry in China remained relatively solid.Compared to the relatively strong bookings in Q3, memory dropped in the fourth quarter. Power/analog/wafer also dropped somewhat compared to the third quarter and especially compared to the record high level in fourth quarter 2022.Now let's have a look at the full year results. At EUR 2.6 billion, our sales in 2023 increased 13% of constant currencies, outperforming the WFE market, which dropped slightly in '23.In terms of customer segments. Our total logic/foundry sales increased slightly and continued to account for more than half of our equipment sales. The leading-edge part of the logic/foundry sales meaningfully decreased, impacted by end market weakness and the delays in a number of new fabs that we reported in earlier quarters last year. This drop in the leading-edge segment was offset by growth in mature logic/foundry, particularly in China.In memory, our sales dropped around 40% against a relatively stronger level in 2022. The drop in DRAM sales was relatively moderate, supported by demand for high-k ALD solutions for high performance DRAM and AI applications.3D NAND sales dropped sharply, reflecting the market-wide sharp investment cuts in this segment. In total, the memory contribution dropped from 19% of our equipment sales in 2022% to 11% in 2023.We booked strong growth in the combined power/analog/wafer segment in 2023. And compared to a relatively lower level in 2022, sales in this segment almost doubled, including the consolidation of a silicon carbide Epi business and also, in large part, fueled by strong growth in China.At constant currencies, our equipment sales increased by 12%. Our ALD sales decreased moderately, impacted by weakness in the leading-edge part of the WFE market, but continued to account for more than half of our equipment sales.Apart from silicon carbide Epi, the vertical furnaces were our strongest growing product line in 2023, in part fueled by solid demand for our new SONORA tool, followed by silicon Epi.Spares and services had another strong year with sales 19% higher with constant currencies and continued momentum in our outcome-based service offering. Our silicon Epi sales increased strongly and comfortably met the target of more than EUR 130 million in 2023.LPE has been successfully integrated and we have been stepping up capacity and capabilities in this business to prepare for continued growth in coming years.Gross margin for the year increased from 47.5% to 49.3% in 2023, mainly reflecting mix, including substantially higher sales from China.Despite inflationary pressures on our cost of goods sold in 2023, we were able to limit this through commercial price negotiations and increased cost reduction value engineering initiatives. We remain committed to gross margins of 46% to 50% in coming years, which we believe is a healthy and sustainable rate.With a normalization in the contribution from China sales in the full year of 2024, we expect a decrease in gross margin compared to 2023.Net R&D increased by 29%, reflecting a record high number of customer R&D engagements and further expansion of our R&D headcount, up 11% in 2023. For 2024, we project a further increase in R&D in support of the rising number of engagements for new applications such as for the second generation gate-all-around and new opportunities in memory.Net R&D expenses will remain at a high-single digit to low double-digit percentage of sales in the period up until 2027 and in the first part of this period more towards the higher end of the range.SG&A expenses increased 10% in 2023, which is broadly in line with the indication that we provided at the start of the year. The rate of the increase in SG&A slowed down compared to 2022, as a large part of the investment to strengthen our organization will be completed by the end of '22, and also due to continued cost focus amidst softer market conditions.We expect a moderate increase in SG&A in 2024. Our target for the period up until 2027 is for SG&A to be a high-single digit percentage of sales. In 2023, SG&A was still at 11.5% of sales. We expect relative normalized SG&A to decrease once revenue growth accelerates again.The operating margin in 2023 was stable at 26.6%. Results from investments, reflecting a 25% stake in ASMPT, dropped from EUR 78 million to EUR 21 million in 2023, reflecting the downturn in the back end market.Now turning to the balance sheet. ASM's financial position remains very solid with cash of EUR 637 million at the end of 2023 and no debt. We generated free cash flow of EUR 447 million in 2023, a record high and up from 17% from 2022.Next to continued solid profitability, free cash flow was driven by improved working capital. Working capital decreased as we managed good collection from our customers. Inventory decreased slightly in 2023.With the normalization of supply chain conditions, work in progress already decreased in 2023, but we still kept high buffer inventories to ensure flexibility in our operations.CapEx increased to EUR 154 million in 2023, up from approximately EUR 100 million in '22. And as a reminder, for the period 2024 till 2027, the target for CapEx is EUR 100 million to EUR 180 million annually. The majority of this CapEx will be geared to the expansion of R&D infrastructure and activities, including the construction of new facilities we announced last year in Korea and Arizona.In terms of shareholder remuneration, we spent EUR 223 million in cash and dividends and share buybacks in 2023. And yesterday evening, we announced a new share buyback program an amount of EUR 150 million, as well as a proposed dividends of EUR 2.75 per share, up from EUR 2.50 last year. We remain committed to return excess cash to our shareholders.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 had relatively solid bookings, but overall market conditions continue to be soft in the fourth quarter.Leading-edge logic/foundry spending was still solid at the beginning of 2023, but demand weakened in the course of the year as we already first reported in April 2023.Demand for advanced node capacity additions continue to be relatively soft in the fourth quarter. Importantly, our customers remain strongly committed to their technology roadmap, in particular, the transition to gate-all-around technology. We finalized activities starting in the first part of this year, 2024.After the first orders in the third quarter, we booked additional and increased GAA or gate-all-around pilot line orders in the fourth quarter.Gate-all-around is a major inflection for our industry, which will drive further improvement in device performance and power efficiency, which in turn will be key for new end market applications such as in AI. We expect gate-all-around to increase our served available market or SAM by USD400 million per 100,000 wafer starts compared to the previous technology node as discussed in our Investor Day.The more complex device architecture of gate-all-around will increase ALD requirements and layers. Silicon epitaxy is also an enabling technology for gate-all-around to create the multilayer stack of nanosheets.We believe we successfully defended our leading market share in ALD in the transition to nanometer. And in addition, based on product tool of record selection with the leading customers, we remain confident that the transition to gate-all-around will drive our overall silicon Epi market share to the target of more than 30% by 2025.In memory, we had good traction in 2023 with our high-k ALD solutions for high performance DRAM, which is a key requirement for AI. As Paul mentioned, this could not offset the steep drops in the other parts of the memory market, particularly in 3D NAND.We continue to work with key memory customers on new applications such as on the expected adoption of Epi in DRAM, which we expect to further increase our share of wallet once the industry migrates to the next memory nodes in the coming years.The softness in leading-edge logic/foundry and in memory market was offset by strong growth in the mature node segments particularly in China.In power/analog/wafer, sales were strong throughout the year. As we already discussed with our third quarter results, demand started to slow down towards the end of 2023. Following 2 years of strong investments in this segments, particularly in the automotive and industrial space, the industry has now started to digest the added capacity.Our revenue was still strong in the fourth quarter, but orders already decreased, and revenue is expected to trend down in the next couple of quarters.Mature node demand in the Chinese market was exceptionally strong in 2023. In power/analog/wafer and also in the parts of mature logic and foundry they were not impacted by export control measures.We confirm the assessment that we shared in the third quarter earnings call that the updated export control regulations that were issued by the U.S. Government in October 2023 are not expected to have a material additional impact compared to what we previously communicated.While the mature node segments were only a smaller part of our revenue in earlier, they had a strong contribution due to the substantial size of the investments in this segment in China during 2023.We also benefited from our investment in recent years to expand our presence and customer base in China. Furthermore, our sales in China also increased due to the consolidation of LPE, which has a strong share in this market. In total, we booked strong growth in China in 2023.On the acquisition of LPE, our silicon carbide epitaxy business performed strongly in 2023. The synergies in leveraging ASM scale and capabilities have already been paying off. We increased development and manufacturing capacity in Italy. We also qualified the latest 200-millimeter silicon carbide Epi tools for manufacturing in our Singapore facility, and we substantially stepped up global support.We expanded our silicon carbide Epi customer base in 2023 with a leading North American customer and a major European player, as previously reported. Additionally, in the fourth quarter of 2023, 2 more customers selected our latest 200-millimeter silicon carbide Epi-tools with multiple tool orders expected in 2024.We believe our tools offer industry-leading performance and cost of ownership, particularly for 200-millimeter silicon carbide Epi processing. We expect to further expand our position as the silicon carbide industry transitions from 150 millimeters to 200-millimeter wafer size over the next couple of years.Despite the recent deceleration in the automotive market, long-term prospects remain strong for the silicon carbide market, driven by structural increase in electric vehicle penetration and other applications such as renewable energy. Supported by new customer wins, we expect strong revenue growth for this business in 2024.The highlight during the fourth quarter was a landmark ceremony in Scottsdale, Arizona, where we will construct a new state-of-the-art research and development center. We will consolidate our existing operations in the Phoenix area and double available cleanroom space. Investment in innovation remains a key priority for our company.In terms of manufacturing, we believe we have the capacity in place to deliver on our 2027 revenue targets. The completion of the second assembly floor of our facility in Singapore and the additional manufacturing in our expanded facility in Korea will in total increase our capacity by 3.7x by 2025 compared to 2020.Next, I would like to highlight our progress in ESG. The highlight this year was the verification of our net-zero targets by the Science-Based Target Initiative or SBTi.We target net-zero greenhouse gas emissions for all scopes by 2035. One of the shorter-term goals in our path towards net-zero to achieve 100% renewable electricity by 2024. We are well on track. In 2023, we increased the use of renewable electricity to 88%, up from 73% in 2022.The longer-term prospects continue to be strong for ASM. Third-party research firms forecast the semiconductor market to grow to more than $1 trillion by the end of the decade. Digital transformation will continue to drive semiconductor usage. Artificial intelligence is expected to be one of the fastest-growing end-market applications.In 2023, the impact on the semiconductor market started to become more significant, triggered by the huge interest in generative AI. Related chip volumes were still limited, but expected to notably increase in coming years. This will lead to more investments in manufacturing capacity for advanced logic devices, such as GPUs and MPUs and high-performance DRAM. And that means for ASM, more ALD and Epi steps.Let's now have a look at the outlook that we issued with our press release last evening. While the economic outlook continues to be uncertain, the broader semiconductor market is expected to recover to double-digit growth in 2024. However, the softer WFE market conditions we saw during the second half of 2023 are continuing into the first part of 2024.Our guidance, as published yesterday evening, is for the first quarter of 2024 revenue to be in the range of EUR 600 million to EUR 640 million and with a similar level in the second quarter.For the second half of 2024, we expect revenue to be up compared to the level in the first half year, but it is too early to provide more specific guidance for the second half. It is also too early to give an outlook for the full year.Looking at the expectations for WFE demand, memory and leading-edge logic/foundry demand is expected to gradually recover in the course of 2024, supported by early investments in gate-all-around. We expect continued gate-all-around orders throughout 2024.Power/analog/wafer is expected to decrease somewhat in the first half. Revenue from the Chinese market is expected to be still relatively high in the first part of the year, but likely to normalize in the rest of the year. For our silicon carbide Epi business, we expect a strong performance in 2024.We expect that ASM will benefit from an expected rebound of the WFE market in 2025. And based on this, we remain confident ASM revenue will increase to the forecasted range for 2025, which is EUR 3.0 billion to EUR 3.6 billion.An important driver supporting this will be the move of gate-all-around 2 nanometer technology into high volume manufacturing in 2025. And 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 the opportunity to ask a question.Okay, operator, we are ready for the first question.

[Operator]

[Operator Instructions] The first question is from Tammy Qiu with Berenberg.

[Tammy Qiu, analyst]

So I have a question on gate-all-around. You mentioned in that gate-all-around order should be received throughout 2024. I wonder what kind of pattern should we be seeing? And also is that actually for volume production in 2025 or that's still going to be for pilot production?

[Gek Lim Loh, executive]

Sure. Tammy, thanks for the question. I think what you are seeing is that, of course, customers have placed orders for pilot line, but the way that they have done this, it varies from customer-to-customer. Some of them will just give you a block or bulk order and for some time, maybe they will not have any more additions.Some of them, they place it, I would say, regularly depending on which process or which process is defined and which equipment has been decided to be a process of record. So we will see both.Now there's also some possibility that you might see that, there's an increase in terms of number of tools that they might buy even for pilot line to increase capacity because of sampling, because of tweaking the yield, et cetera. So we do expect that we will be seeing gate-all-around orders throughout the year.The end of the year is where we potentially could see pull in for high volume manufacturing. It is actually announced and reported by one of the 3 players that they are trying to pull in 2 nanometer high volume manufacturing into early 2025. And if that happens, they'll probably have to order and buy the tools already by the end of the year.

[Tammy Qiu, analyst]

That was clear. And also, from your market share perspective on the 3 players on the GAA production line, are you basically getting very similar kind of steps within all 3 chipmakers or it kind of varies between different players?

[Gek Lim Loh, executive]

They do vary, because even though the technology is common, it's gate-all-around technology, but there are different ways that they design it. So you do see differences between the 3 of them. So it's difficult to give a generalized idea, for example, exactly what is the increase or how each one compares to the other. But there are differences between the 3 of them.

[Victor Bareño, executive]

Thank you, Tammy.

[Operator]

The next question is from Stephane Houri with ODDO BHF.

[Stephane Houri, analyst]

Actually my first question is about the second half of 2024. There are obviously different scenarios, there are different moving parts like market recovery in logic/foundry or analog expected, gate-all-around starting to rise. What about memory? What about China?And on what do you base your assumption that there will be a rebound in the second half? And if you can help us trying to quantify this kind of rebound.

[Gek Lim Loh, executive]

Sure, Stephan. Thanks. I think you have mentioned all the factors that, I would say, contribute to a lack of visibility or maybe uncertainty, the pace of recovery for memory, for example, how much is the normalization in the China, matured logic and foundry, any recovery in the power/analog/wafer, et cetera.And I think that's the reason why we have decided not to quantify the second half versus the first half. However, we are confident that the second half, we should see that leading-edge, logic and foundry, primarily driven by gate-all-around, will be stronger.At the same time, we are already seeing signs, maybe still a little bit slow at the moment, but there will be probably more investments coming in the DRAM, especially for high-performance DRAM because of the drive by AI. And that usually is good for us, especially with the high-k or ALD tools.So I think with that, we kind of are confident that we should see a second half that is higher than the first half. But until we have more clarity, which probably could come in a couple of months, so it might be that we might use a better visibility or better guidance when we announce our first quarter results. As of today, we will just leave it as second half will be higher than the first half.

[Stephane Houri, analyst]

And my second question would be about silicon carbide, because there has been a lot of, let's say, discussion in the market that with the slowdown in EV maybe silicon carbide investment will be more moderate. And you didn't give a guidance for your revenues in silicon carbide for 2024, so can you help us understand how it's going to grow this year?

[Gek Lim Loh, executive]

Sure. So I think the reason why we gave a guidance, first, for EUR 100 million and then we upgraded it to EUR 130 million last year was because it was the first year, and we just did -- we just acquired them. So I think we wanted to give more color to everybody how big this business is potentially going to be.But I think going forward, as we have always -- let's just say, we don't give individual, what we call, product or segment breakdown because it's very competitive, and whatever we say can be easily picked up by also our competitors. Nevertheless, we did, as we have in the prepared remarks, we did much more than EUR 130 million for last year. And this year, we do expect to significantly increase that.You are right, Stephan, that EV is slowing down and there's been some concern about, okay, for silicon carbide devices, is that going to continue growing? I think we do see a slowdown in the growth. So it's not a slowdown in the market, but slowdown in the growth. So it's growing slowly, slower than what it used to be, but I think it is still growing.And what is really propelling that, of course, if you see a lot of silicon carbide manufacturers preparing for potentially the ramp that will come when the EV market comes back. And at the same time, they are also exploring a lot of other, let's say, markets, which are much smaller, but they are meaningful such as renewable energy.So what we are seeing is really that despite the market being a little bit growing slower, it is still going to result in a significant increase in revenue for us this year. And when it comes back, I think we will be in a very good position.

[Victor Bareño, executive]

Thank you, Stephan.

[Operator]

The next question is from Janardan Menon with Jefferies.

[Janardan Menon, analyst]

I just wanted to get a feel for what you see for this year since you haven't given full guidance, but I'm trying to get some information on what your thoughts are.For instance, semi, the industry organization is forecasting WFE this year to grow at 6.5% and for many years now ASM has always comfortably outgrown WFE as you did once again last year as well.I'm just wondering, is there anything specific that you see in 2024 which would cause ASM's revenues to underperform WFE? Is it that you have specific exposure in China or something like that, or excess in mature nodes outside China where there could be a slowdown and that could affect you?Or is it that at this point, you just don't know? But if WFE does grow at 5%, you'll probably grow at least at 5%, if not something higher than that. And that's my first question. I have a short follow up.

[Gek Lim Loh, executive]

Sure. Janardan, thanks for the question. I think the explanation is actually easier than that. It's 2 reasons. One is, I think the data research companies and the independent organizations like semi, I think the WFE number or growth that they have is still fluctuating and you still see a pretty widespread between 0 to some have gone up to at least 8% or 9%. So it's kind of quite a widespread. So I think there's still a lot of uncertainty as to exactly how much it will go. This is not uncommon. It's just that we are at the beginning of the year, so we need to be more careful about that.Second thing, of course, as we have mentioned, we know that the second half is going to be, or our second half is going to be higher than the first half. But we do not want to quantify this yet because of some of the reasons that we have mentioned earlier.And as I said, in a couple of maybe months, when we have a better view of exactly how the second half is going to shape up, I think we might be able to come back the statement on how we will perform relative to WFE this year.But if you look at the longer term history of ASM, we have always kind of outperformed WFE over the last couple of years, and we do intend to outperform WFE again over the next couple of years. In fact, I think we have great opportunities because whatever is being driven by gate-all-around is actually helping us increase, let's say, the part where we play in the share wallet. So we are actually confident that longer term, over the next couple of years, we will outperform WFE.

[Janardan Menon, analyst]

Understood. And just on the second half, is the uncertainty on which way it will go coming more from the memory market and you have some idea on how the 2 nanometer advanced logic side will go? Is it more sort of an uncertainty on how much weakness there will be in China or something like that? I mean, can you just give us some color on where you see more of the uncertainty?

[Gek Lim Loh, executive]

Sure. I think it's a combination of all of them. So let's take it one at a know leading-edge logic/foundry, specifically 2 nanometer gate-all-around, I think we are seeing already signs. There have been also official reports published that we are seeing acceleration.So there's a lot of competition between 3 customers of ours, and they're all trying to get to a market as soon as possible, which is good for us as an equipment supplier because they are trying to accelerate that. But how fast? I think that's still a question mark.Memory recovery is also to some extent uncertain. I think as we said, DRAM because of the AI push driving a high-performance DRAM that should be relatively, I would say, will gradually grow. But there's no view now, especially on 3D NAND. In fact, the latest report that came up from one of our customers is that they are still trying to cut production capacity. So that's another one.We have mentioned that China will be matured in logic and foundry will be strong -- continue to be strong in the first part of 2024. And we do expect it to normalize in the second half. But how much of the normalization? I think we still need time to look at it.And then of course we have mentioned as well that power/analog/wafer, the order trend has been going down since probably the end of last year. Is there going to be a recovery? Maybe at the end of the year. That's another factor that we want to have a little bit more time so that we have better visibility before we make any concrete judgment.

[Victor Bareño, executive]

Thank you, Janardan. Thank you.

[Operator]

The next question is from Francois Bouvignies, UBS.

[Francois-Xavier Bouvignies, analyst]

My first question is on the memory side. So you disclosed that it's now 11% of your revenues and it's down 40%. And I was actually surprised by the drop. I mean, it's actually underperforming, even the memory market, I mean, at least minus 40%. That would suggest that you are much more 3D NAND exposed than I thought you would be -- with this you have minus 40%.And since the beginning of the year we saw some light on the memory side, if you look at VAT and ASML on the orders. So I was wondering, you talked about high bandwidth memory, but we don't see any much impact, at least in orders. You didn't particularly mention it. And your performance last year would suggest that you have a low exposure toward that.Could you tell us maybe, like, or give more color about your content opportunity -- I mean not your content, but your incremental market opportunity for HVM, for example, or [ DDFI ] versus traditional one, and how your market share is evolving there? That would be very helpful, because we don't see much evidence of any traction on your side, so was wondering.

[Gek Lim Loh, executive]

Sure, Francois. I actually -- thank you for your observation that we actually underperforming the entire memory market.

[Francois-Xavier Bouvignies, analyst]

It's not my goal too. I was just factually --

[Gek Lim Loh, executive]

No, no. I think, first of all, I think, memory, especially on the 3D NAND side, has been very, very weak and the weakness actually continues. As I said earlier, we are even hearing -- actually there was a report that one of our customers is even going to cut the production even further.What has really been in 2022 driving 3D NAND for us, of course, was ALD gap-fill and there was a fairly big win which was a very nice chunk of revenue for us and that contributed to our significant memory sales increase in 2022. And of course, in 2023 that almost evaporated, because there was just no investment in 3D NAND.Now, of course, if you look at 2023, and actually it follows also from 2022, our big play in DRAM has always been in high performance DRAM, always DDR5. And of course when generative AI started kicking off and driving a lot of HVM, that helped us a lot. So we already saw additional orders for some tools that are required to make HVM type of memory, I think as far back as the third quarter of last year.And we do expect that this traction is going to continue because the demand for HVM memory devices is just huge. And I think this is of course driven by AI. And as we go on, we think that we will probably see more orders for this type of tools because they are absolutely essential for making HVM. I hope that kind of gives you some color between DRAM and 3D NAND.

[Francois-Xavier Bouvignies, analyst]

That's very clear. And maybe on your market share there. I mean, the memory has been more on the batch side for some time and you saw a couple of opportunities on the single coming through. But how is it evolving with HVM? Can you quantify a bit the number of incremental layers that you can address maybe, or your market share? Anything you could flag there?

[Gek Lim Loh, executive]

Maybe not in terms of layer. But you are correct, Francois, I mean, memory is a very cost competitive type of commodity. So of course batch type of tools do have a certain advantage. But as the technology progress and as they go into a very advanced devices, let's say, scaling and so on, more and more, you'll find that some of these applications will have to change to a single wafer ALD. And the high-K ALD tools is one example.So a lot of -- not a lot -- I'm seeing increasing demand for high-k ALD tools because these are required to make high performance DRAM, whether it's DDR5 or whether it's HVM. So that is where it's helping us in this down market, even for DRAM.

[Victor Bareño, executive]

Thank you.

[Operator]

P^Operator^ The next question is from Didier Scemama, Bank of America.

[Didier Scemama, analyst]

I'm going to try again on HVM. Could you just give us a sense -- it's probably a stupid question, but I just want to understand. So what we learned from ASML order intake in Q4, is that to get the best deals on HVM dies you need EUV. Is that not mutually exclusive, but does that also mean that high-k metal gate is a must for HVM.And related to that, how are you positioned in Korea -- have you got one customer or 2? And I've got a follow-up for Paul on OpEx.

[Gek Lim Loh, executive]

Didier, I think you could try to correlate that, because when you look at DRAM, they -- especially the more advanced guys, they started adopting EUV with one layer and then they went up to 4 layers, and it's probably more now. I haven't kept track of that. But a lot of this was used for making advanced DRAM devices, so high-performance DRAM.And at the same time, you've got the launch of DDR5 and also HVM3, and they also need high-k ALD, let's say, tools. So there is some correlation, but I do not think that it is a one-to-one proposition. It's just that the most advanced DRAM devices or what you call high-performance DRAM, it seems that both EUV and high-K ALD are used.

[Didier Scemama, analyst]

And on Korea, I mean. How -- yes.

[Gek Lim Loh, executive]

We have both. Both of them are --

[Didier Scemama, analyst]

To be perfectly honest, I think we are all a bit surprised that you're not seeing the sort of pop in orders from the Koreans on high-K or at least -- if not in Q4, in Q1 or Q2, given the lead time differences with ASML. And clearly, the ASML orders, which is spectacular, I mean I think that's probably an understatement. So I'm just a bit surprised you are not seeing that. Or perhaps you are suggesting you're going to get that in the second half, and I suspect you will.Just can you help us understand? Is that a meaningful part of your second half recovery, if not in revenues, at least in bookings?

[Gek Lim Loh, executive]

Okay. I think the easiest way to understand this Didier is our peer in lithography, their lead times are probably anything for 15 to 18 months, especially when you talk about EUV. Our lead times are 6 months. So our customers still have a lot of time.And potentially, as I said earlier, we do expect to see continued orders for our high-k ALD tools until the end of this year. But we are not going to, at this moment, let's just say, tell you when it is coming in. But we do expect that the pace of memory recovery, first of all, will increase and it should lead to increased orders for us.

[Didier Scemama, analyst]

And just for Paul quick one. I mean taking into account all the things you said on the mix, should we assume gross margins to trend down in the second half? And I think you've been sort of fairly explicit on OpEx, but I'm sorry to be stupid, but can you give us maybe a range of OpEx range for the full year, you're thinking about? Because obviously, we don't know if your revenues are going to be down 1%, up 5%, up 10%, down 5%. And so it's the OpEx number is something you've got control above. It's a fixed cost. So that would be helpful to understand, you don't have visibility on the top line.

[Paul Verhagen, executive]

Yes. Thanks for the question. Maybe first on your gross margin in the second half. I think it's fair to assume that we will see some drop compared to '23 simply because we believe that China, which is one of the mix factors will start to normalize somewhere in the later part of this year.In the first part, we still expect a strong contribution from China with, as you know, above average profitability. And towards -- yes, the latter part of the year, we expect that to normalize. So there will be some impact, very likely on the margin, so somewhat lower.And then, of course, other mix elements can have a plus or a minus, but that's always difficult to tell given the number of tools that we have with different margin potential.On the OpEx, as I mentioned in the -- just now, SG&A, expect a marginal increase compared to this year. Not a lot. Of course, there will be some merit, there's maybe some inflation. But don't expect a major step up there. R&D will continue to invest. So that will go up. As we said, also, our, let's say, medium-term guidance is high-single digit, the low double-digit, whereby we will be maybe even above the range slightly in the beginning period given that the revenue is not yet growing as to the extent that we foresee in 2025. So we might go a little bit over that range in '24.

[Operator]

The next question is from Adithya Metuku with HSBC.

[Adithya Metuku, analyst]

I had 2. Firstly, just around 2025 demand around gate-all-around. I just wanted to hear your thoughts on what level of capacity are you expecting to be deployed. Is it around 80,000 wafer starts per month, which is normally what you see at the leading-edge in the first year? Will it be higher, lower? If you could give any color around that, that you factored into your 2025 outlook, that would be very helpful.And secondly, just on the high-k metal gate or high bandwidth memory, which you talked about earlier. You talked about high-k is just one of the growth drivers. I just wondered if you could give some color on what the other growth drivers are for ALD tools apart from the high-k step in the transistor part of DRAM? Any color there would also be very helpful.

[Gek Lim Loh, executive]

Adithya, thanks a lot. I think the capacity is something that -- we do have, let's say, an estimation in mind as to, for example, each one of the 3 players, how much they would ramp. But I think at this moment, we think that that could change. As I said earlier, some of them are already announcing that, look, they are trying to accelerate, move to high volume manufacturing.But overall, if we look at just maybe for 2024, we expect that the orders that we are going to get from gate-all-around for logic and foundry will be larger, will be greater than half of all of our logic and foundry orders. So the transition to gate-all-around is really happening. And we do expect that orders will continue throughout the year. And we still have to maybe wait a little bit as to how much of the high volume will be done next year. But I think overall, we are positive that there should be a significant amount of investment also in 2025.High HVM and high-k metal gate, I think we have tried, or at least my colleague Hichem has tried to explain during our Investor Day that, the high-k is only one layer, but there are other layers inside that are gradually being adopted that is also helping us.One example, just to give one of the layers, is perhaps at the most advanced DRAM devices, instead of just the hafnium silicate, they are now also adding, for example, lanthanum oxide, and that's also on our tool. So we do have more than one layer there. And as they get more and more advanced, especially at the latest generation of DRAM devices, it becomes more complicated and they have to use even more layers. And fortunately, a lot of these layers are done on our tools.

[Adithya Metuku, analyst]

Understood. Very clear. By the way, is this your last call or you?

[Gek Lim Loh, executive]

Unfortunately, no. I still have to do the first quarter.

[Adithya Metuku, analyst]

Okay, got it.

[Operator]

The next question is from Marc Hesselink with ING.

[Marc Hesselink, analyst]

First question is actually a small explanation in the press release. You're saying that your bookings in the fourth quarter are also a bit ahead of your own expectations, among others, for the gate-all-around pilot lines. Is there anything that we can breathe into that?The fact that it's a bit bigger than you expected earlier, does it mean that also eventually it can become a bit bigger and more applications for you, or is that not the way to think about it?

[Gek Lim Loh, executive]

So, Marc, thanks for the question. It just came in slightly bigger than what we expected. I think customers were ordering maybe additional tools as part of their pilot line, and that's why it was a little bit higher than what we had expected, especially after we had already announced that some of the orders actually dropped into the third quarter. So we were, of course, very positively pleased with the additional orders.I don't think it really signifies, for example, does that mean that they're going to invest more in HVM or anything? It's just that they order more tools for their pilot line.

[Marc Hesselink, analyst]

Okay, clear. And then the second thing, you obviously added a lot of capacity. You elaborated on that before as well. But given what we're now seeing with AI, and also you stress it multiple times now during the call, is the capacity also enough for you in, let's go beyond a little bit, the medium term, and last time it was maybe sort of easy to add your capacity, given that you already had the floor ready. Is it going to be that easy for you again to add the capacity, if needed?

[Gek Lim Loh, executive]

Yes. The construction of the second building in Korea that will be completed early next year. I think it's in the first quarter or maybe early second quarter. Now, that is still the smaller part of our early second quarter. Now, that is still the smaller part of our, let's say, capacity in terms of manufacturing.What we have with that, and also with our facility in Singapore, as we have shared before, we can easily accommodate all the way up to the high end of our 2027 target, which is EUR 5 billion. So we do not really have an issue with manufacturing capacity, and we are ready to be able to supply when the demand comes.

[Marc Hesselink, analyst]

So with the current AI story, there's no scenario that you will get into capacity constraints?

[Gek Lim Loh, executive]

I mean, Marc, it's of course possible if the demand is so big, but we are always have -- we're cautious that, look, we need to track the demand carefully. And should we see signs that it is going to get to a level where it's going to exceed the capacity that we have, we need to start, let's say, planning for that quickly. Because for every new factory that we build, it's easily 24 months. So we are very carefully monitoring that. But at this moment, we have enough capacity all the way until our plans for 2027.

[Operator]

[Operator Instructions] The next question is a follow up from Tammy Qiu with Berenberg.

[Tammy Qiu, analyst]

So I have one on China. So you mentioned that China demand would be leveling off in second half of the year because of capacity digestion period. I kind of think that a lot of the China investment was actually strategic related. And also they probably do have that market to absorb incremental facility requirement, given the EV industrial trend. Where's your assumption of China will be leveling off? And do you think there potentially can be some upside from that?

[Gek Lim Loh, executive]

Tammy, part of it is just based on discussions that we are having with customers and over the last, I would say maybe 24 to 36 months, there's been a lot of investments into what we call mature technology in China. And we do expect that a lot of this now are going to come online in the sense that they are finally going to be doing high volume manufacturing and producing wafers, which ends up in devices.I think your assumption, or what you have heard is not incorrect in the sense that within domestic China itself, there is a huge demand for such chips. So it is possible that maybe they still need even more. Let's put it this way.Our view, based on what we are seeing today, based on backlog, based on what our customers are giving us as forecast, is that the beginning of 2024 is still going to be strong. But we have not really great visibility now as far as the second half is concerned. And for that matter, for that reason, that is why we are saying that it might normalize. But how much it will normalize? It's difficult for us to tell at this stage.

[Tammy Qiu, analyst]

And lastly -- sorry, you mentioned that your sort of process within different GAA players are different. Can you confirm your market share is as strong as within all 3 players for GAA process, or your market share differs?

[Gek Lim Loh, executive]

So when you look at the ALD part, we are very confident that we have at least maintained our market share from the pre fab days. And I would just add that on the silicon epitaxy, we have in fact gained market share.

[Operator]

The next question is from Ruben Devos with Kepler Cheuvreux.

[Ruben Devos, analyst]

I just had a question around an initiative by Japanese consortium, which I believe has the objective to transition to mass volume on 2 nanometer by 2027 via gate-all-around. I was wondering whether you've had any engagements with them so far? And I guess, there's been some activity generally in market. So curious to hear what your views are on the developments in this region and to what degree you can see some of the local opportunities?

[Gek Lim Loh, executive]

So I -- of course, we are engaged, but I will not say the name. In fact, I visited them last week. And it's a very, I would say, highly focused on project by the Japanese government to really try to build their own, let's say, leading-edge type of capabilities. I think they are still very much in the early stages, but we are, of course, heavily engaged with them and with their partner in the U. S. So that's all going well.I think in general, when you look at Japan as a whole, the government is focusing a lot now on semiconductors, and they have been subsidizing or giving incentives to a lot of investments that are happening today in Japan. And I think this will actually kind of rekindle Japan as a major semiconductor manufacturing location.

[Ruben Devos, analyst]

That's helpful. And just a final question on the aftermarket, would be helpful if you could share a few comments on that. I guess, you were trending higher in terms of growth rate for the aftermarket relative to equipment sales. I suspect that could be the same for '24. It would be helpful to have your thoughts on this.

[Gek Lim Loh, executive]

Yes. So I think for 2023, we grew at 19%, which was nice. And I think a part of it is because some of the outcome based services, the type of products that we have been pushing, we are gaining traction. I think we will continue to see a very nice growth again in 2024, but we will not give a number at this stage.

[Operator]

The next question is from Nigel van Putten with Morgan Stanley.

[Nigel van Putten, analyst]

Just a clarification, Benjamin, on what you said around 2024 gate-all-around orders. I've written down, but I'm not entirely sure that you said greater than half of our logic/foundry orders are for 2 nanometer or gate-all-around. Is that correct? Or did I miss that?

[Gek Lim Loh, executive]

I feel that's correct. That's correct.

[Nigel van Putten, analyst]

So that's quite a step up then. I mean, if we model third quarter, fourth quarter maybe combined triple digit, but I have to sense that per quarter, high double-digit, then this should be quite a step up relative to what we've seen in the last 2 quarters, is that correct?

[Gek Lim Loh, executive]

Yes, I think the way that you described it is quite a step up, but I think now we are seeing orders really coming in. And as I mentioned, we will continue to get orders throughout the 2024.And again, I want to refer to what I said earlier. We also see some signs of acceleration. One of them has publicly committed that they even want to pull in. So I think it's moving. It's moving in a very nice way and we are actually quite sure that we will see more than half of our logic/foundry orders being 2 nanometer gate-all-around.

[Nigel van Putten, analyst]

All right. And then, Paul, a follow-up on sort of OpEx. There is, obviously, also the capitalization line in cash flow. Is that approaching CapEx this year, so $160 million to $200 million or maybe a little bit too high?

[Paul Verhagen, executive]

You can expect this year, let's say, some acceleration in the amortization, because we have, of course, capitalized quite a lot in the last, whatever, a number of quarters, even last 2 years, especially given the -- of course, all the upcoming inflection that now start to gradually move into pilots and then, of course, into high volume production. So there you can expect an acceleration.At the same time, there is still a lot of engagements going on -- new engagements. You can also see it in the balance of our EVO tools. So also capitalization will trend up further. But I -- yes, if you look at the ratios, if I put it that way, over the last, let's say, 2 years, I think the relative ratio of capitalization relative to growth spend and amortization relative to growth spend will not change a lot. So you will still see a step up in both of them.

[Nigel van Putten, analyst]

So I guess, there is a bit of a headwind on the P&L and the ratio is staying the same, okay?

[Paul Verhagen, executive]

There will be some -- relatively some more amortization than this year. That's what I expect, yes.

[Victor Bareño, executive]

Thank you, Nigel.

[Operator]

The next question is from Adithya Metuku, HSBC.

[Adithya Metuku, analyst]

Just 2 more. Just I noticed the impairment of some capitalized R&D in the quarter about EUR 2.5 million. I just wondered if you could shed some light on what happened here. Are these some projects that you expect to materialize that didn't come through? Just any color there would be helpful. And then just as you look through to the second half of this year, one of the potential uncertainties is tied to political change in the U.S. And how that may affect your ability to ship to China. So I just wondered if you could quantify what proportion of your revenues in this year came from China and how you're expecting that to trend in 2024? Any high level color around that would be helpful.And if possible, if you could talk about why your CapEx came in a bit lower than expected this year as well would be helpful.

[Gek Lim Loh, executive]

Hey, Paul, do you want to take the impairment and CapEx and I do the second half?

[Paul Verhagen, executive]

Yes, let me take the first one and the second one -- the third part of the question. On the impairment, it's very simple. It's indeed a project that was started, where at a certain moment in time, at a certain toll gate, you recognize that we need to maybe take a different turn or take a different approach. That happens sometimes.Luckily, this time, we've seen it on time. So only between a vertical mass EUR 2.5 million, but yes, that happens sometimes. Not every project that we started is, let's say, successful from the get go onwards. So that's the first one.On the CapEx, now we guided these EUR 150 million to EUR 200 million. Our phasing of CapEx is always difficult to predict because you never know precisely progress, invoicing, et cetera. So we are just in the range that we gave. So I would not read too much out of it.But, yes, given the uncertainty, yes, we forecasted a pretty big range, EUR 150 million, EUR 200 million, and we're just in that range. At the same token, we have guided for 2027, for EUR 100 million to EUR 180 million also. That gives quite some large range again. And that's an indication of different phasing of CapEx in between years. That's very difficult to precisely predict.

[Gek Lim Loh, executive]

Adithya, on your question on the second half, with the political change, China, I wish we have some better ideas of forecasting this, but it's just not possible. And our view is that, we should just continue. As long as there's demand, the customers want our products, we will supply them with our products, fully complying to all the regulations of the 3 countries. But as to how this will change because of the potential change in the political situation in the U.S., it's just almost impossible to predict. And again, we comply to all the regulations, every single one of them, and we do whatever business that we can do.

[Adithya Metuku, analyst]

Got it. And maybe, are you able to quantify what proportion of your revenues came from China in 2023?

[Gek Lim Loh, executive]

Yeah, well, I can only say that it's a significant percentage. If you look at 2022, we mentioned that it was about 16% or so. We will not disclose a full number, but we can only say that in 2023, because of the massive investments also in mature logic/foundry and also power/analog, it increased significantly for us.

[Operator]

And the last question is a follow up from Didier Scemama, Bank of America.

[Didier Scemama, analyst]

Thank you. Question for Ben on AI, actually. So AMD have given an AI TAM for, I guess, their accelerator business or accelerators at large, an HVM of about $400 billion in 2027, up from $45 billion last year. Sam Altman is also -- there were press reports that were talking about $7 trillion of capital investments to build AI chips, et cetera. So we're going to put that aside for a minute.But I don't think many people in the market really believe in that $400 billion TAM in 2027. But if we were to dream for one minute, that would effectively imply a 2027 global semiconductor TAM of almost a trillion dollars, which is double from '23 level.And so the question to you, Ben, is what's the latest? If these numbers are even remotely close to reality, when does these orders need to come in for semicap companies? Is 2025 already too late, or can they come a bit later for those fabs to be built and the revenue to be delivered on that time frame?

[Gek Lim Loh, executive]

I think the way to look at that, Didier, is to make a wafer at advanced nodes, so whether it's 3 nanometer, 2 nanometer. The wafer probably has to stay in the fab for 6 months. 6 months, or sometimes maybe even longer. And that is when the wafer is completed and then it has to be packaged, which is probably going to take another couple of weeks, et cetera.So if you really look at the demand coming in at the end of -- let's just say the demand is required December 2025, I think they have to already start manufacturing this early 2025, otherwise you are not going to get the chips.

[Didier Scemama, analyst]

No. Understood. But I guess the question -- the more broader question, is there enough capacity today to satisfy a trillion dollar of semiconductor demand in 2025 with the up -- basically the majority of the upside coming from AI, so leading-edge.

[Gek Lim Loh, executive]

I think that's easier because the AI chips is already having constraints in terms of advanced packaging, let's say capacity. So you look at, for example, the largest foundry making a massive investment for advanced packaging and also getting the help of what we call the OSATs to do that? So that is actually the bottleneck. It's the packaging, the advanced packaging, that is the bottleneck. Now, if you go to a trillion, I haven't done the math, but my guess is there will not be enough capacity. But I hope we get there.

[Didier Scemama, analyst]

Me too.

[Victor Bareño, executive]

Thanks Didier.

[Operator]

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

[Gek Lim Loh, executive]

Thank you, Judy. So I would like to thank you all for your attendance today, also on behalf of Paul and Victor. We look forward to seeing many of you in our upcoming investor conferences and virtuals.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.