BE Semiconductor Industries NV

AEX:BESI

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, good afternoon, ladies and gentlemen and welcome to Besi's Quarterly Conference Call and Audio Webcast to discuss the Company's 2022 Fourth Quarter and Full Year Results. You can log into the audio webcast via Besi's website, www.besi.com. Joining us today are Mr. Richard Blickman, Chief Executive Officer; and Mr. Leon Verweijen, Senior Vice President, Finance. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded and cannot be reproduced in whole or in part without written permission from the company.

I would now like to turn the conference over to Mr. Richard Blickman. Please go ahead, sir.

[Richard Blickman, Chief Executive Officer]

Thank you. Thank you all for joining us today. We will begin by making a few comments in connection with the press release we issued earlier today and then are happy to take questions. I would like to remind you that some of the comments made during this call and some of the answers in response to your questions by management may contain forward-looking statements. Such statements may involve uncertainties and risks as described in the earnings release and other reports filed with the AFM.

For today's call, we'd like to review the key highlights of our fourth quarter and year ended December 31, 2022 and also update you on the market, our strategy and the outlook. First, some overall thoughts on our performance. Besi's fourth quarter operating results were better than expected in an ongoing industry downturn. Revenue of €137.7 million decreased by 18.4% versus the third quarter last year, reflecting a number of headwinds, including weakness in high-performance computing and mainstream electronics applications and ongoing weakness in mobile and user markets.

However, our backlog rose 12.2% to reach €270 million due to a €55.2 million or 44.1% sequential order increase. Such increase resulted primarily from higher bookings for high-end smartphone applications and hybrid bonding systems. Current order trends reflect customers' continued investment in high-end versus mainstream assembly applications as well as ongoing weakness in demand by Chinese customers. Besi's profitability and efficiency remained at attractive levels despite the downturn with gross margins reaching 62.3%, net income of €40.2 million and a net margin of 29.2%.

This year marked an important inflection point in our strategic development as we position Besi for sustainable growth over the next decade. Our business model generated revenue and profitability levels substantially higher than peers as we effectively responded to an assembly downturn following large capacity additions over the past 2 years.

For the year, revenue and net income of in total €722.9 million and €240.6 million declined by 3.5% and 14.8%, respectively, versus 2021. Orders of €663.7 million declined by 29.3%, principally due to decreased demand for high-end smartphone applications post new product introductions in 2021. The decrease also reflected reduced bookings from Chinese subcontractors for mobile and mainstream computing applications linked to softening economic conditions. Of note, revenue from Chinese customers declined by 33.5% and represented 25.9% of revenue in 2022 versus 37.6% in 2021.

Revenue and order weakness in smartphone applications was partially offset by continued strength in Besi's computing/hybrid bonding and automotive end-user markets as well as increased revenue from spares and service activities which grew by 25.7%. We achieved peer-leading operating and net margins of 40.7% and 33.3% in a difficult environment as we successfully aligned production to changing market conditions. In fact, gross margins increased to 61.3% this year due primarily to a 77% reduction of temporary headcount from peak first quarter levels, effective management of our supply chains and price increases implemented to help offset inflationary cost pressures.

As you can see in this next chart, Besi's 2022 revenue decrease was almost exclusively due to lower mobile revenue. As a result, its percentage of the total revenue decreased from 43% in 2021 to 28% in 2022, primarily offset by an increase in computing end-user market applications from 19% to 30% and increases in automotive and spares and service to 16% and 17%, respectively. Besi's revenue and profitability has increased significantly since the last industry downturn as measured by a comparison of the years immediately following cyclical peak levels.

As evident in this next chart, revenue, orders and operating income in 2022 grew by 37.6%, 37.4% and 17.3% [ph], respectively, versus 2018 and operating margins expanded by 7.8 points [ph]. Besi ended the year with a solid liquidity base consisting of cash and deposits of €671.7 million, or €8.56 per basic share and a net cash of €346.5 million. We will propose a cash dividend of €2.85 per share which reflects a payout ratio of 93%. Including such dividends, Besi will have returned approximately €1.6 billion to shareholders over the past 13 years or approximately 25% of cumulative revenue.

Shareholders were rewarded for their investment in Besi with an increase in dividends and share repurchases of €236.8 million or 132% versus 2021. Of note, we repurchased 2.7 million shares this year for €146.8 million and have bought another 670,000 shares to date in Q1. Our objective is to further reduce Besi's share count to offset potential dilution from prior convertible bond issuance.

Next, I'd like to speak a little bit about the current market environment and our strategy. As seen in this next chart, industry conditions have deteriorated significantly since the second quarter last year, highlighted by slowing memory, mainstream computing and data center markets, continued weakness in Chinese markets and CapEx reductions announced by many of the largest semiconductor producers. The assembly market was the first to experience the full impact of the current downturn.

TechInsights estimates that our market decreased by about 10.6% in '22 with an additional decline of 16.8% anticipated in 2023. Thereafter, a new upturn is expected with the total market reaching USD6.9 billion in 2025. We made a number of important R&D and business investments in 2022 to better position ourselves for anticipated growth over the next industry cycle. Development spending was increased by 48% to ramp hybrid bonding for commercial production, to introduce 2 new wafer level assembly systems and to upgrade our existing product portfolio.

Operational resources were utilized to increase cleanroom production and service/support capacity in Malaysia and Singapore as we prepared for anticipated hybrid bonding growth over the next 5 years. To prepare for expected hybrid bonding market growth, we have increased development staff in Austria, Singapore, Taiwan and the U.S. by 26% over the past 2 years and expanded capacity to 12 to 15 hybrid bonding systems per month. In addition, we retrofitted our Malaysian production facilities to better protect them against potential climate change-related events and work has begun on a new tooling facility in Vietnam as many customers shift a portion of their production outside of China to other locations in the Southeast Asian region.

Substantial progress was also achieved to help hybrid bonding become a market reality. Significant improvements in placement accuracy, throughput, yield and lead times all contributed to its commercial viability. Full-scale production began in the second half of 2022. In total, Besi has shipped 35 hybrid bonding systems since the fourth quarter of 2021, of which 10 were demonstration units, per revenue producing units we shipped 4 in 2021 and 21 in 2022. In addition, we received orders for an incremental 14 units from multiple customers subsequent to Q3 last year, of which 3 orders were received to date in the first quarter of '23. Orders received in Q4 '22 are not anticipated to be shipped until Q2 of this year, of which several are to be incorporated into integrated production lines. Of note, the first integrated production line was shipped in the fourth quarter.

Interest in hybrid bonding process technology is also gaining significant traction with the development community. We shipped an evaluation system to IMEC in Belgium, an industry which research institute and received an order in Q4 from a prominent American university for hybrid bonders as part of integrated lines. In addition, chiplet interface standards are now being developed by the industry's largest players to help facilitate its adoption and utilization. The progress also continued on Besi's ESG agenda this year, where 2022 targets set in 2020 were met or significantly exceeded in key carbon emission categories as well as in the areas of waste, hazardous materials and renewable energy.

Now a few words about our guidance. There is a high degree of uncertainty as to the outlook for 2023. The assembly market is in a classic downturn after 2 strong years of growth. However, we believe there are a variety of potential outcomes for Besi's prospects this year in the context of the current down cycle, including the outlook for smartphone and hybrid bonding demand as well as the impact of the reopening of the Chinese economy. The headwinds we face are many, including higher inflation and interest rates, decelerating economic growth, geopolitical tensions and ongoing weakness in mainstream electronics, computing and mobile handset end-user markets.

For Q1 '23, we forecasted revenue -- the decrease in a range between 0% and 10% versus the fourth quarter last year as many orders received in Q4 are scheduled for delivery in Q2 and Q3 this year. In addition, we estimate that Besi's gross margin will range between 61% to 63% and that baseline OpEx to decrease by 0% to 5% versus the fourth quarter of last year. Total operating expenses are expected to increase by 15% to 20% due to an incremental €7 million of noncash share-based compensation expense. Further, we expect an effective tax rate of between 12% and 15% and CapEx of €8 million to €10 million for the year 2023.

That ends my prepared remarks. I would like to open the call for questions. Operator?

[Operator]

[Operator Instructions] We will take the first question from Madeleine from UBS.

[Madeleine Jenkins, UBS]

So my first is around hybrid bonding. According to certain press releases, we've heard that an American IDM will possibly have a slow ramp-up of tools this year than maybe previously expected. Could you just tell us what you're seeing from your end? And if this is the case, is there like projected 52 [ph] capacity you have this year be satisfied by demand elsewhere? And I have a quick follow-up, if I may.

[Richard Blickman, Chief Executive Officer]

Well, as explained in the press release but also in the comments, hybrid bonding is certainly a broader adoption trajectory which started 2 years ago in Taiwan. And last year was critical to set up the first production capabilities in Taiwan. And we have always shared with the investment community that according to our information, the U.S. should follow suit with maybe a year in between. Preparation is ongoing. As we also mentioned, we are setting up support group people in different locations. And that could very well lead this year to a significant increase in the capabilities onshore in the U.S., likely with capacity coming on stream early next year. So that's sort of the timing we hear.

We are well prepared for that. As you also mentioned the 12 to 15 machines per month is stressed, we can even build more. But that is definitely sufficient to support the capacity required for the industry simply bottom-up accounting in the next 2 to 3 years. And it takes us about 6 to 9 months to increase our capacity further. So this year will be very important, further adoption capacity expansion. You also see that in the orders we received in Q1, let's say, Q4 first and then additional orders in the early part of this quarter. So that basically fits that picture.

[Madeleine Jenkins, UBS]

Okay, great. And another question I had was around your orders. You mentioned in the release that part of the increase you saw was due to high-end smartphones. Could you maybe provide some more details around the drivers within this? Is it some specific content increase or more of a global market driven?

[Richard Blickman, Chief Executive Officer]

Well, it's content related. It is a preparation for a next round. The question is always how large will that round be. It's encouraging that these orders are placed in Q4. That also has to do with supply chain issues which the whole world has experienced in the past 2 years. But yes, it's simply preparing for a next high-end smartphone round.

[Operator]

We will take the next question from Ruben from Kepler Cheuvreux.

[Ruben Devos, Kepler Cheuvreux]

I just had the first one on hybrid bonding as well. I think in the press release, you mentioned that you've made significant improvements on various KPIs. Could you maybe talk in more detail about the progress you've made. I believe you've mentioned in the past that sort of progress in placement accuracy and throughput would drive ASPs and that if all goes very well, you could be looking for ASPs of €6 million to €8 million per system. So is that still your thinking today? And how do you see ASPs maybe evolve through the next 2 years compared to what it has been maybe for the 35 systems [ph] shipped so far? That's my first question.

[Richard Blickman, Chief Executive Officer]

Excellent. Well, let me first create some reference. Until the mid of '21, we were in a development phase. And as of Q3 '21, there was this famous first application and chiplet from AMD which sort of ignited a mainstream adoption. So that resulted in orders which we started to install in early Q1 last year with some hiccup due to some production reasons. But basically, as of February and March, we really started to install machines to be used in full-time production. As we shared every quarter, this has been a typical road of many issues because these machines in the beginning are not fully tested in production environment but we've come a long way and we've shared in the last conference call end of October that the yield out of these machines has moved from as low as 20% to about 80% yield in end of October. That yield has further improved since and that simply results in higher output per machine.

One must understand and we've shared that in the Capital Markets Day, simply comparing output of high-end flip-chip machines to these hybrid bonders. With flip chip we reached 7,000, 8,000 units per hour. And in this hybrid universe in the later part of '22, we are now reaching somewhere between 1,500 and 2,000 UPH. So about 1/4 output. We have also shared that there are continuously programs ongoing to make these machines more stable, higher yields and that then leads to further increase of output. And that is needed to connecting chips to chips. And as we enter into '23, continued improvement on machines is ongoing every single day and we should reach that 2,000 UPH for certain die sizes as a standard and that then will simply cause further adoption of hybrid bonding.

I'm explaining this a bit lengthy because this is with every new technology. And then you could ask the question, are you ahead of your expectation or behind? Well, today, we can say, well, this is exactly what we have expected also the industry simply understands is that is why the adoption rate is gaining not only at specific customers but far more broadly. So that looks all very positive but we're still in an early phase. So a lot still has to come and that will come. Then what we also should realize, we are now in Generation 1 and that is 150-nanometers [ph] placement accuracy and production may be 200. We will ship the first 100-nanometers for Generation 1 plus or Generation 2 and is then capable of bringing this accuracy down to 100 nanometers. And that is important because that is linked to a node size shift around 3, 5 nanometers and that will further create the possibilities of chiplet architecture design devices and not only for high-end computing but also for high-end mobile and those developments are critical in the course of 2023 and then anticipating mainstream adoption in 2024.

So there's a big program, first of all, making the first generation more 100% production capable, reaching yields close to 100%. And then a next generation going down to 100 nanometers. And that always starts with somewhat slower production capabilities because of the accuracy and especially vibration are critical issues in these applications but we will master that. So a full program for 2023, heading up to a major expansion anticipated in '24, '25 and '26.

[Ruben Devos, Kepler Cheuvreux]

Okay, very clear. And I think, Richard, you mentioned that there could even be adoption from high-end mobile. I think in the past, we share that current market estimates do not really reflect adoption of hybrid bonding in this market. So I mean when you look at the slide in your presentation, that was always excluding high-end smartphone, right? So mainly on computing.

[Richard Blickman, Chief Executive Officer]

No, no. If we -- we have always, let's say, shared that the world is first and that is happening, high-end computing, data center modules and graphics, so all logic based and then adding also memory to that and then the high-end, let's say, smartphone arena in '24, '25. And that road map still stands -- road map and timing has not changed. And why is that important? Mostly those road maps are very ambitious and they continuously shift because of all kinds of technical reasons and market reasons. But it's fair to say that the adoption rate of hybrid bonding for every application is so far not disappointing. Let me share in those words.

[Ruben Devos, Kepler Cheuvreux]

Okay, very clear. And then maybe a final question, a bit high level, just thinking about the Chinese market for which demand was down materially last year. I understand you were not negatively impacted by trade restrictions but what's your take on the production shifts that are taking place, I believe [indiscernible]. So what could be the impact maybe both in the short term and in the long term?

[Richard Blickman, Chief Executive Officer]

Well, it's common knowledge that every company is investigating and taking action to reduce exposure to China. And for that reason, as we have done always, we follow customers and we prepare for supporting customers in other Asian Pacific regions which step by step, will either be organized or set up for new products but it may very well be that also existing capacities may shift. And that's on top of the very high end, where we have these restrictions now and to be very clear, we simply follow the direction of the U.S. in this case. And there's also no idea that this will change in any way in any time soon.

So Besi's strategy is still to be prepared for capacity expansions outside of China for capacities moving out of China, supported by our facility in Malaysia which we have expanded significantly last year with a major new facility added to our current facilities. And then we are setting up. We're in the middle of setting up our first operation in Vietnam. And those 2 should -- with the China for China facility which is ongoing supporting the Chinese market ready for how this market will develop in the years to come.

[Operator]

We will take the next question from Robert from Deutsche Bank.

[Robert Sanders, Deutsche Bank]

I just had a question about the computing PC server business line. It seems like that is now the largest segment as per the last year at 30% of sales. That growth is pretty surprising to me. So can you just tell us a little bit more about what's happening there? Have you won more content at Intel, for example, have you won some TCB business after [indiscernible]; is there something else going on there? I have a follow-up.

[Richard Blickman, Chief Executive Officer]

Well, the last one is still to come. As we explained in previous updates, we have -- or we are very close to shipping the first next-generation TCB shift away for tool in April -- in the month of April which is fully ready for the next generation. But so far in '22, it also surprised us in a way or let's say, surprise in that sense the drop in high-end smartphone was significant. And the rise in the computing applications simply adds the revenue recognition in hybrid booming which is for modules in data centers and high-end computing. So most part is ongoing strength in our market positions for a long time and whether that's in the U.S. or in other regions. And then on top of that, you have the hybrid bonding systems.

[Robert Sanders, Deutsche Bank]

Got it.

[Richard Blickman, Chief Executive Officer]

I think that -- also answering the question of some people, is this cannibalizing your current flip chip business? And the answer is simply no.

[Robert Sanders, Deutsche Bank]

Got it. And then on the order beat, you mentioned that your largest smartphone customer may have ordered more because of supply chain concerns. Does that concern you a little bit when you think about Q1 orders? I mean are you kind of borrowing a little bit of the strength that you normally see in Q1 into Q4? Or do you think that Q1 can still be as is traditionally the by far the biggest quarter of the year when it comes to order intake?

[Richard Blickman, Chief Executive Officer]

Well, it's a bit of both. But you have to again segment the hybrid bonding orders. So we had 11 in Q4. And decent ones also wants to be connected to automated lines and then 3 more in January. And then a nice round first round for a next-generation high-end smartphones. How much more there is to come is very difficult to forecast as we have shared over the years. The market timing decisions are very much February, March, sometimes even April. And we have to be prepared. Simply, we have to be prepared to respond at the timing expected we are. So anyway, it's exciting to see what may happen.

[Operator]

The next one is from Charles, Needham & Company.

[Charles Shi, Needham & Company]

This is Charles Shi from Needham. Maybe my first question, I want to go back to your high-end smartphone demand. I think this may be the swing factor because as you said, there is a variety of outcomes for you in 2023. I noticed that for your Q4, you mentioned that year-on-year, what's driving the bookings and the language you used in the press release seems to suggest that the bookings in Q4 last year from high-end smartphone customers seems to be relatively in line with the fourth quarter '21. But looking into first quarter '23, I mean, relative to first quarter '22, I think that will likely tell us how your 2023 business is going to trend on a year-on-year basis. I know that the particular customer, they tend to place a greater amount of orders in Q1 but we are at the end of February, now almost 2/3 into the first quarter this year. What can you tell us right now relative to last year but the order coming from this high-end smartphone customer, is it going to be better than last year or in line or not trying to put words into your mouth, I don't think it's going to get worse. But how do you feel about that? Are you feeling good right now?

[Richard Blickman, Chief Executive Officer]

Well, let me answer that with what we have said also at the end of Q3, when we announced that we had some long lead item orders already in the third quarter because of supply chain issues. If you look at the historic pattern of major new content in high-end smartphones. There was usually 3 years in between. The last time we had -- yes, a major up cycle was '21, a bit of an overflow in '22. So we have always been, yes, a bit careful in why would this 3 years be reduced to 2. On the other hand, we received these long lead item orders and we've also received very nice orders so far.

There may be some impact because of significant market share gains of the U.S. high-end smartphone manufacturer in China and with an economy in China improving, maybe there's some anticipation of even stronger growth to be expected. But -- the only -- yes, let's say, the answer I can give you is that this is always uncertain in a way that we have to be prepared but how much ultimately will come. And I always remind you of the second quarter of 2018 which we'll never forget that we received a major round in March, April -- February and March, April time frame. And in the third week of June, half of that was canceled. So it's an unpredictable market. But that's it. Whether we like that or no, you simply have to be able to handle that. So I can't give you more clarity, Charles.

[Charles Shi, Needham & Company]

Yes. I think the other -- I mean, on a full year basis, like 2022, the weakness was attributed to 2 factors primarily, right, one is high-end smartphone. We just talked about that. But the other one is China. And I don't think you've provided much specific view or your outlook in China is this year. But can you give us a sense what is the order book you have that tells you about the China strength this year, especially we are out of the Chinese New Year, I think historically, this is when new orders will come in from China but over the last 1, 2, 3 weeks, how -- how has your order book have been trending coming out of China?

[Richard Blickman, Chief Executive Officer]

Well, happy to share. First of all, we were all, let's say, hoping for a next round after Chinese New Year because of a very slow market last year. And with the growth ambitions and everything happening in China, one would expect that. So many of our peers and customers sort of also analysts in general markets have expected in a positive turn in the Chinese market. Well, it's fair to say now until February that has not happened. Some are now expecting and forcing that, that will definitely happen in the second half of this year. Also the -- yes, Chinese economy is improving. But if we simply being out the utilization rate at the 4 major subcons. Those utilization rates today tell us simply that they're not imminent to order a major next route.

So that fits more into as things develop but also the worldwide economy and if things don't deteriorate in general with China, U.S., then statistically with 6 quarters down, you should see a turn in tight in this summer and improving in the second half of this year. That's, let's say, an answer to -- of your question from our view. If we are wrong, well, we can be wrong that it comes more early because some are saying, "Well, maybe it will come in April, May." Well, we're happy to see. If it takes longer yes, then you look into a model which the world does not yet share, 2024 should certainly be again an up year. So the question is, when does the tide turn. Well, Besi is prepared definitely for a turn. Any items in our machines and modules also devices, critical devices, long-lead items. You have to be prepared in this industry at short notice. But the key is Charles, we don't see at this moment a turn in this tide yet.

[Charles Shi, Needham & Company]

Maybe just lastly, I want to say your hybrid bonding shipment plus new orders, you're approaching 45 total number of units and almost there to reach the 50 tools, that's a magic number. I think lots of people are skeptical about hybrid bonding. I think it's ahead of its time but I think your numbers are definitely showing the opposite. I want to really say congratulations. And that's my last question.

[Richard Blickman, Chief Executive Officer]

Any further questions?

[Operator]

We have Didier from Bank of America.

[Didier Scemama, Bank of America]

Richard, I wanted to go back to the order intake for Q4. I'm going to put words in your mouth. So it sounds like €60 million [ph] has been brought forward from Q1 to Q4. So should we just assume that your Q1 bookings are going to be around €60 million [ph] lower than your Q4 level? Or is there any reason why it could be flat given the seasonality?

[Richard Blickman, Chief Executive Officer]

Again, hybrid bonding is new. So I can also answer it in this way. If we would not have, let's say, success of hybrid bonding in the numbers, as explained to earlier questions, our numbers would reflect very much the overall downturn in the assembly market. So hybrid improves the picture and that is continuing. So that's a positive development on top of our conventional business. But as we explained in the press release and to speed that, again, we're in a typical downturn, a classical downturn and some positive developments of new technologies and a lot of them being hybrid but there are also other new technologies.

So you can't simply say, well, €60 million [ph] was ordered earlier because of supply chain issues; so Q1 should be €60 million [ph] less. It's not that simple but anyway, I think the key is to repeat that again, so far, we are going through this downturn in a very positive sense with significant decline in the classical and that is also, yes, to some extent, in the high-end smartphone applications last year. Chinese, as we discussed earlier, Chinese subcontractors only very new things but no capacity expansion whatsoever. We haven't discussed automotive. Automotive is still holding on. There are many strategic investments in expanding capacity for automotive. That also has helped us last year and will help this year. Yes, that's roughly the picture.

[Didier Scemama, Bank of America]

Okay. And I just wanted to go back to your point on hybrid bonding and high-end smartphones. So I think you said this is an important year to get to 99.9% yield on hybrid bonding. Any feel as to whether that happens in the first half or more in the second half. And I just wanted to repeat if I heard correctly, high-end smartphone adoption for hybrid bonding in '24, or if I misunderstood?

[Richard Blickman, Chief Executive Officer]

Well, the first question, the 99.9%, we should reach this year certainly 99%, whether it's 99.9%, I don't know. But these machines as they are now running around the clock, are improving day by day. So that is very positive development. What is key to understand, we shipped in Q4, the first, let's say, bonders [ph] which were integrated to a line in Taiwan and that is brand new. Although we have this first line in the center of excellence of AMAT in Singapore. We are now installing and starting up this line for production. And in the course of this year, that also will take some time to become in the 99% category. Same will happen in the U.S. So a lot of focus on the integrated line concept and why this integrated line concept because that improves the yield simply by less particles. So that's very important for further adoption of hybrid bonding in all applications.

To your second statement on high-end smartphone adoption, it's dependent upon very much the cost of ownership which results from further improvement on the either stand-alone hybrid bonder systems or the ones which are integrated into integrated lines. So that also will be critical this year and whether it will be ready for the major round anticipated in high-end smartphones in '24, whether that's going to be the technology of choice, we will find out in the summer in July, August, September time frame.

[Didier Scemama, Bank of America]

And then final question for me is on high-performance compute and the ChatGPT AI application we see. It feels like hybrid bonding is a perfect technology to tackle ChatGPT with the stacking of DRAM on top of server CPUs to run the inference or even to run the training of the algos. So one of your customer is actually showing hybrid bonding or 3D IC packages with 3 DRAM stacked on top of the service CPU to tackle some of those applications. When do you think that might be a driver of the hybrid bonding adoption at your leading customer.

[Richard Blickman, Chief Executive Officer]

Well, that is also '24, '25. Remember, last year, we shared several times the progress on this stacking of memories, a U.S. customer, also high, not only interest but engagement in Korea right now which should lead to further yes, let's say, adoption and then expansion into mainstream applications. There's a new one currently by logic customers stacking logic on logic which is also a major development. So these are all applications in hybrid bonding, using hybrid bonding technology. And it will be, as I said several times in this call, '23 will be a very important year to see where this hybrid technology can really become the mainstream and then for very specific end products. And one of them being, of course, high-end smartphones, that will change the landscape significantly with many more capacity required; so many applications underway.

[Operator]

We'll take the next question from Marc from ING.

[Marc Hesselink, ING]

Yes. My first question is actually also a follow-up on the hybrid bonding in mobile. Do I read it correct that if you get the performance up as planned, then that bottlenecks away? Or do you also need some step-ups from the fabless companies to really make that shift to hybrid bonding in mobile?

[Richard Blickman, Chief Executive Officer]

Well, that's a very good question again. They are preparing for that. Don't forget that for any fabless company, they are fully dependent upon the capabilities of this fab. So that's very transparent. Does that answer your question?

[Marc Hesselink, ING]

Yes, yes. That's okay. The second question is actually on the ASP of hybrid bonding. I assume that in this current ramp up, it remains relatively stable but I also believe that when you really improve the performance, then the ASP should start to move up. Where are we on that process?

[Richard Blickman, Chief Executive Officer]

Well, first of all, you can simply understand from our gross margin development in total that we are definitely in a good situation so far. Increase in ASP is always linked to increase in features. So in these machines, there's a constant development with automatic tool exchange with certain host computer communication software, loaders are very critical. And when customers want to build chiplets, you need to have different chips loaded into that machine. So there's a high degree of development in preparing those different devices for connection in this chiplet architecture. And those features in the end will increase the ASP of these machines.

Then you have underlying and we also had a comment on that in this prepared notes because of inflation and also other cost increases, we increase, of course, our prices of our machines because of that. So you have an ASP inflation, you can call it. And on top of that, you have increases because of additional features, both hardware and software. We have guided in the ASP range in the Capital Markets Day between €1.5 million and €2.5 million [ph] for this first generation, the 150-nanometers [ph]. We have guided somewhat higher €3 million [ph] range with the 100-nanometer capability because that machine is more complicated than especially vibration is an issue with increased accuracy. So that will also increase the ASPs but so far, that is the development but in a positive -- positive outcome so far.

I can also say differently, these ASPs are, of course, impacted today by the enormous support we have to provide in bringing these machines up to full production capability. Once these machines are running to expected and also committed specs immediately, you have less support and that leads to higher margins.

[Marc Hesselink, ING]

Okay. And then maybe as a follow-up on the gross margin on the group level, very strong and already I think at the higher end of the previous long-term medium-term ambition, I can imagine that today, the mix is very favorable. But is it true that you made another step change there on the gross margin level?

[Richard Blickman, Chief Executive Officer]

Well, what is, of course, very important to simply note, it's been a very difficult year 2022. So from a supplier supply chain issues from increased inflation over time. Labor costs simply increased labor costs. But then offset by improved system performance customers who are also faced with inflationary pressures so difficult negotiations and improving pricing. But overall, this is definitely a higher gross margin than '21. On an equal-to-equal basis, there was some impact on the gross margin in '21, because of this flooding in Malaysia. But then still, if you would take that out, margins have slightly improved '22 over '21. But as you said, the mix, it's always with new technologies, we have higher margins because a simple question, why would you develop an application for a new technology if it doesn't bring you a higher margin? So from that basic principle, that's where today we benefit.

[Operator]

We have the next question from Nigel from Morgan Stanley.

[Nigel van Putten, Morgan Stanley]

Another question on hybrid bonding, obviously. So thank you for the color on order intake in both the fourth quarter and current quarter. I guess it showed a little bit of lumpiness as is to be expected. But also given your comments so far about the current generation versus the next generation and current yields, from the feedback from your customers, do you expect any additional platforms to enter production this year based on what I assume to be shipping the first generation tool still? Or are these for development purposes broadly? That's my first question.

[Richard Blickman, Chief Executive Officer]

No, no. The key is this year that they are definitely used in a broader-end application. And that's why the adoption is gaining traction. If it would only be development, you would not ship 35 machines.

[Nigel van Putten, Morgan Stanley]

No, that's clear. I mean that's for the one customer that's already using the tools on multiple platforms. But you've mentioned in the press report for IDMs [ph].

[Richard Blickman, Chief Executive Officer]

Okay. So let me start with the first customer. Suppose there are 6 versions so far. And then also the other customer in the U.S. who is setting up now production capability, they have finally decided on 3 major families which will be 100% using hybrid bonding interconnect technology. And that is, let's say, explaining why this ramp could materialize in the second half of this year and certainly the first half of next year. And then there are also other customers carrying road maps using hybrid bonding. And on top of that, the major subcontractors are now preparing to install a hybrid bonding capability. So they must have customers driving that capability. Otherwise, why buy expensive tools. So there's a broad adoption, apart from what we mentioned also in answer to earlier question that we're now seeing the memory world starting seriously to set up capabilities to connect first of all, memories, so memory packs which are then prepared to stack on [indiscernible]. So these are all, let's say, mainstream applications, a portfolio of many devices.

[Nigel van Putten, Morgan Stanley]

Excellent, that's clear. And none of them is sort of waiting for the second gen. I mean you've mentioned those could be used for 3 and 5 nanometers front end. Does seem that especially SRAM shrink doesn't really work, then so you'd expect major more application of hybrid bonding once we reach that note in the mainstream. Is that -- how should we think about this? Or could you see customers use both for second -- third generation depending on their application?

[Richard Blickman, Chief Executive Officer]

No. The first, what you explained. That is how we read the rollout or the adoption of this hybrid bonding technology.

[Nigel van Putten, Morgan Stanley]

That's then true for -- I mean, there's many questions on smartphones but I guess also GPUs, CPUs, it's sort of tied into that 3, 5 nanometer. Okay. That's great. Very clear and good to hear that this one major logic customers finally also made a decision. Second question, I do want to again ask about the order book for the current quarter. From the press release, I get that at least most of the hybrid bonding tools are do shipments in the second quarter. But obviously, historically, the smartphone camp has also asked for shipment in the second quarter. So is that first the right way to think about that? And then second, maybe putting it a bit more bluntly, do you expect a positive book-to-bill for the first quarter?

[Richard Blickman, Chief Executive Officer]

That expense both on bookings and billings. Well, we don't guide for bookings. And as explained, some elements are hard to read how much more will be prepared for a next round to say it in those terms. As always, exciting in a market environment which as explained also by China which is still a soft market. Automotive is continuing investments, yes. Well, Q2 and Q3 will certainly, as it looks today, be with also the orders received higher revenue quarters. But it's too uncertain to give guidance for more than the current quarter.

[Nigel van Putten, Morgan Stanley]

Understood. Maybe my last question, again, a follow-up on the order intake. Would it be fair to say given supply chain conditions improving that the backlog should normalize by the second quarter. Is that at least something we could assume?

[Richard Blickman, Chief Executive Officer]

Yes. But also don't forget in that backlog, you have a hybrid bond orders and the manufacturing lead time still of about 15 to 20 weeks, depends a little bit. So they are more than workaround that changes the profile, the historic profile where we had typically quarterly run rate. But your point about the backlog overall, yes, it should be more normalized.

[Operator]

Next question from Ries from Apus Capital.

[Johannes Ries, Apus Capital]

This is Johannes Ries. Maybe 3 follow-on questions. First, on the topic again, of hybrid bonding. It's clear, it's a hot one. Maybe if I remember right, you talked already about third generation, maybe which coming into the future for 50-nanometer [ph] bonding. Only to make it clear, this smartphone may be major adoption in '24, '25. Is it based on the generation -- to a Generation 3 most likely?

[Richard Blickman, Chief Executive Officer]

High-end smartphone Generation 1 and 1 plus, Generation 2, not Generation 3. Generation 3 is sort of 50-nanometer [ph] is in full development. Prototypes you can see in Radfeld where we may have, again, a capital markets update in June. But that will not be shipped to a customer before, let's say, part of '25.

[Johannes Ries, Apus Capital]

But also we then used maybe also in the high-end smartphone market or even other applications?

[Richard Blickman, Chief Executive Officer]

First, the high-end computing application. That should be linked to 2- and 3-nanometer architecture. So that's very advanced.

[Johannes Ries, Apus Capital]

Okay. Maybe a market -- maybe I'm not so active only to understand the development. You talked -- said even hybrid bonding will be used maybe to stack the memories together. Is that maybe an application which also will use wafer-to-wafer technology? Or is it...

[Richard Blickman, Chief Executive Officer]

Yes. But wafer to wafer, the limitation, as we know, [indiscernible], not more than 2 [ph] and they have to be identical. Whereas the chip to wafer, you can stack more than 2 [ph]. And in the past with TCB, we stacked 8 and we still are machines too. So -- and that is a similar, let's say, technology trend for the hybrid applications.

[Johannes Ries, Apus Capital]

Okay. I see. So for you also in the game, let's say, for memory for use cases in the memory space, okay?

[Richard Blickman, Chief Executive Officer]

Yes, certainly.

[Johannes Ries, Apus Capital]

Great. Maybe on your integrated solution, whether we will go -- together with AMAT go in the mass adoption? And what does it mean for your ASP? Have use the same ASP in the integration solution? Is it different and why?

[Richard Blickman, Chief Executive Officer]

The integrated solution requires a mechanical handshake, you have to simply understand that, that will be integrated [indiscernible]. And then we have the softer part of that. So the scheduling is the critical, let's say, piece in an automated line. We have started that development already over 1.5 years ago. First system is installed at a key customer in Taiwan in Q4, 2 more in the U.S. this year. And as we also said they will not be in full production until '24. So '23 is the year of testing, qualifying devices and aimed at the very high end.

[Johannes Ries, Apus Capital]

And how maybe your account, maybe -- how you shares or revenues was aim to remind us get everybody in part of it [ph].

[Richard Blickman, Chief Executive Officer]

It is very transparent. We deliver bonders to customers. And AMAT delivers integration and also other tools for that automated line. And that is separate. So we have no deliveries to one another. We both deliver to those customers.

[Johannes Ries, Apus Capital]

Okay. I got it. And maybe finally on another technology, only you said you have other technology going from -- how -- maybe what is maybe is the development of the TCBs technology in the next 2, 3, 4 years?

[Richard Blickman, Chief Executive Officer]

Well, we are about to ship in April, end of March, the first next-generation TCB tipped a wafer system to a major U.S. customer. And that is definitely a key development for the next many years to come. So what is special about this next generation? It's again more accurate. It can achieve accuracies at around 1 micron. Other systems, competitive systems are not yet reaching that and it's also difficult to reach. It also has other capabilities which are unique. And that will definitely define the next generation for all kinds of logic applications. So next to the hybrid bonding. We will then have a complete portfolio which can be used for, let's say, practically every high-end logic and memory chiplet architecture application.

[Johannes Ries, Apus Capital]

So for hybrid bonding and TCB will develop next -- both separate technologies which for different use cases and even TCB is an interesting growth driver going forward?

[Richard Blickman, Chief Executive Officer]

Yes, absolutely.

[Johannes Ries, Apus Capital]

Great. And yes, it sounds very interesting.

[Richard Blickman, Chief Executive Officer]

Any further questions?

[Operator]

No further question at this time. Then Mr. Speaker, I'd like to turn the conference back to you for any additional or closing remarks.

[Richard Blickman, Chief Executive Officer]

Well, let us thank everyone for participating in this call. And if you have any further questions, don't hesitate to contact us. Thank you. Bye-bye.

[Operator]

That concludes today's event. Thank you for your participation. You may now disconnect.