ASM International NV (AS:ASMI) (ASM) has announced a positive performance for the second quarter of 2024, with a 6% year-over-year revenue increase to €706 million.
The growth was primarily driven by a 20% increase in spares and service revenue and a 4% rise in equipment revenue, attributed to strong ALD shipments. The company's order intake surged by 56% compared to the previous year, reaching €755 million, with memory orders leading the expansion.
ASM International's strategic focus remains on developing their positions in the logic/foundry ALD and memory markets, alongside investments in research and development (R&D) and infrastructure. The semiconductor market is anticipated to hit the €1 trillion mark by the decade's end, propelled by digitalization and electrification trends.
Key Takeaways
- ASM International's Q2 revenue increased by 6% year-over-year to €706 million.
- The company's order intake for Q2 was €755 million, a 56% increase year-over-year.
- Strategic priorities include expanding positions in logic/foundry ALD, memory markets, and investing in R&D and infrastructure.
- The global semiconductor market is expected to reach €1 trillion by the end of the decade.
- ASM International expects Q3 sales to range from €740 million to €780 million, with a 15% sales increase in the second half of the year.
- The company remains confident in their growth strategy despite challenges in the China market.
Company Outlook
- ASM International projects Q3 sales to be between €740 million and €780 million.
- Sales in the second half of the year are expected to increase by approximately 15% over the first half.
- The company maintains its revenue projection for next year, estimating between €3 billion and €3.6 billion.
Bearish Highlights
- The company noted a drop in sales in China, particularly in the mature logic/foundry segment.
- Bookings and sales in China are expected to decrease further in the second half.
- Soft demand in the 3D NAND market, though gradual improvement is expected.
- Silicon carbide Epi market conditions weakened in the second quarter, with a full-year market downturn anticipated.
Bullish Highlights
- Strong order intake in Q2, particularly from the memory sector.
- The company has been selected by all three leading customers in the silicon Epi market.
- Strong demand for high-bandwidth memory used in complex AI computing.
- Anticipated double-digit growth in silicon carbide sales this year.
Misses
- Sales slowdown in both China and globally for the power/analog/wafer segment.
- Potential downturn in silicon carbide technology in 2024 due to slower EV adoption.
Q&A Highlights
- Hichem M'Saad confirmed adherence to the same entity list as American peers in China.
- The company expects a "reasonable chunk" of HBM orders for delivery in 2024 and 2025 to be fulfilled in 2025, with some deliveries in 2024.
- High-k metal gate technology is seeing increased adoption in high-performance memory products.
ASM International's robust performance in the second quarter of 2024 reflects the company's strategic focus on expanding its market positions and investing in future technologies. While there are challenges, particularly in the Chinese market, ASM International's confidence in their growth strategy and the semiconductor market's potential suggests a promising outlook for the company.
InvestingPro Insights
ASM International NV (ASMIY (OTC:ASMIY)) has demonstrated resilience with a robust second-quarter performance in 2024, showcasing its ability to navigate a dynamic semiconductor landscape. To provide further context to ASM's financial health and market position, let's consider some key metrics and insights from InvestingPro.
InvestingPro Data shows that ASM International has a market capitalization of $32.49 billion, illustrating its significant presence in the industry. The company's P/E ratio stands at 54.14, indicating a high valuation by the market, which could reflect investor confidence in its future earnings potential. However, it's important to note that the P/E ratio is slightly adjusted down to 53.3 when considering the last twelve months as of Q2 2024. Additionally, the company has experienced a slight revenue decline of 4.18% during the same period, which investors should monitor in relation to the company's overall growth trajectory.
Two InvestingPro Tips offer further insights: Firstly, analysts have revised their earnings upwards for the upcoming period, suggesting that ASM International's financial prospects may be improving. Secondly, the stock has taken a significant hit over the last week, which may present a buying opportunity for investors who believe in the company's long-term strategy and market position.
For readers interested in a deeper analysis, there are 19 additional InvestingPro Tips available for ASM International, which can be accessed through the InvestingPro platform. To enhance your investment research with these insights, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
Overall, while ASM International faces challenges, particularly in the Chinese market, the company's strategic investments and market adaptability position it well to capitalize on the long-term growth of the semiconductor industry.
Full transcript - ASM International NV (ASMIY) Q2 2024:
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM Second Quarter 2024 Earnings Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Victor Bareño, Head of Investor Relations. Please go ahead, sir.
Victor Bareño: Thank you, operator. Good afternoon, and welcome, everyone, to our Q2 earnings call. I'm joined here today by our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its second quarter 2024 results yesterday at 6:00 p.m. Central European Time. For those of you who have not yet seen the press release, it is accessible on our website, along with our latest investor presentation. As always, we remind you that this conference call may contain information relating to ASM's future business and results in addition to historical information. For more information on risk factors related to such forward-looking statements, please refer to our company's press releases and financial reports, which are available on our website. Please note that the profitability measures mentioned in this call will be primarily based on adjusted non-IFRS figures. For the reported figures as well as the reconciliation between IFRS and adjusted results, please refer to the quarterly results press release. And with that, I will now hand the call over to Hichem M'Saad, CEO of ASM.
Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our second quarter 2024 results conference call. It's a real pleasure to talk to you today. And as most of you know, I took over as CEO last May. I already met many of you in our previous Investor Days and at other occasions, and I look forward to meeting many more of you in our upcoming investor conferences and roadshows. For today's call, Paul will first review our second quarter financial results. I will then continue with the discussion of the market plans and the outlook followed by the Q&A as usual. Over to you, Paul.
Paul Verhagen: Thank you, Hichem, and once more, welcome everyone. Before I begin, I'd like to make an organizational announcement following the appointment of Hichem as a CEO. We decided to redistribute some Hichem's day to day responsibility at the executive committee level. As part of that, we expanded the executive committee with two new members, both with impressive track records and experience in our industry. Paul Ma, since 2018 with ASM and responsible for the Thermal Products business unit and Steve Reiter already with ASM since 2015 in charge of plasma products and epitaxy. Let's now review the financial results. In the second quarter of '24, revenue came in at €706 million at constant currencies up 6% year-on-year. Revenue was slightly above the top end of our guidance of €660 million to €700 million. Equipment revenue increased 4% year-on-year at constant currencies and was mostly driven by robust ALD shipments, which accounted for more than half of the equipment sales. Spares and service revenue had a solid performance with 20% year-over-year growth at constant currencies. In terms of customer segments, revenue was led by foundry, followed by memory and then the power, analog, wafer segment. Combined logic/foundry sales continue to represent the larger part of our sales and were roughly stable, both versus Q1 and compared to Q2 last year. Compared to the first quarter, sales related to the gate-all-around 2-nanometer technology increased while mature logic/foundry sales were lower. Memory sales increased strongly both year-on-year and versus Q1. DRAM sales accounted for the larger part of the memory and with a quarterly record high. This was mostly driven by ALD and high-K tools for high bandwidth memory. 3D NAND revenue also increased markedly, but that was from a relatively lower base. Sales in the power/analog/ wafer segment, excluding certain carbides, were somewhat higher than in Q1 but still meaningfully lower than the average trend last year. Gross margin in the second quarter came in at 49.8%, up from 49% in the same quarter last year, but down from the exceptionally high level of 52.9% in the first quarter, mostly explained by mix. Part of the mix development is the contribution of China sales, which was still strong in the second quarter of '24, albeit below the record high level in the first quarter. SG&A expenses increased by 19% compared to the second quarter of last year and by 20% quarter-on-quarter. SG&A included one-off tax expense of €8.4 million resulting from the thresh [ph] testing of previously granted performance shares. Excluding this one-off item, SG&A expense increased 7% year-on-year. And for the full year 2024, we continue to expect a moderate increase in SG&A. Net R&D in the second quarter increased 11% year-on-year. For the second half, we expect a higher increase in net R&D due to higher amortization of development expenses. As explained in the previous quarter, this is due to a number of newly developed products and applications for which amortization is expected to start over the course the year. For the full year '24, we expect net R&D to increase between 10% and 20%. Operating margin decreased to 25.8%, down from 26.9% in the same quarter last year. Not taking into account this one-off tax charge that I just mentioned, EBIT margin would have been 27%. Below the operating line, financial results include the currency translation gain of €16 million. This compares to a translation gain of €8 million in the second quarter of last year and €23 million in the first quarter of '24. As a remainder, these currency gains and losses are explained by the fact that we hold the largest part of our cash in U.S. dollars, and the translation differences are included in our financial results. Then over to ASMPT briefly. Our share in income from investments, reflecting our stake in ASMPT amounted €4 million in the second quarter, down from €5 million in the first quarter and down from €9 million in the second quarter of last year. Now back to ASM. Our order intake in the second quarter was at a strong level of €755 million, an increase of 56% at constant currencies compared to the same quarter last year and up 8% from the first quarter. Orders were led by memory, followed by the logic and foundry. Memory orders increased strongly to a quarterly record high and consisted primarily of orders for HBM-related DRAM applications. The underlying trend is robust, especially for HBM, and we expect continued healthy memory demand. It should be noted that DRAM models were particularly high for this quarter, and order intake can be a bit lumpy from quarter-to-quarter. Total logic/foundry orders decreased compared to the first quarter. Gate-all-around orders were solid and increased somewhat compared to Q1, mature logic/foundry orders decreased year-on-year and compared to the previous quarter. In silicon-based power analog, bookings were at a decent level, despite continued market weakness. Silicon carbide Epi orders were solid, the highest level in the past six quarters and included multiple - and included multiple tool orders for a new 200-millimeter fab project in China. Next, to balance sheet. We ended the quarter with €637 million in cash, down compared to €712 million at the end of Q1. In the second quarter, we generated a solid free cash flow of €103 million, thanks to continued solid profitability and with only a modest outflow for working capital. CapEx amounted to €36 million in the second quarter. And as a reminder, our '24 target for annual CapEx continues to be between €100 million and €180 million. In Q2, we used €135 million in cash for the payment of dividends of €2.75 per share. In addition, we used €59 million for share buybacks as part of the €150 million buyback program that was started on May 15. And at the end of June, we had completed 39% of the program and 78% at the end of last week. And with that, I hand the call back over to Hichem.
Hichem M'Saad: Thank you, Paul. Let me first start with a recap of our strategic priorities. After I took over as CEO in May, a number of investors ask if I was going to make any changes to our strategy. My answer is clear. We will continue with our growth through innovation strategy. I joined ASM in 2015 and in the past 5 years, I was in charge of the entire product portfolio as well as of research and development. In 2022, our joint ASM's Management Board, which means I have been privy [ph] to many of the decisions that were made over the past few years, including company strategy, investment in infrastructure and so on. I feel very confident that ASM's growth through innovation strategy has been working, evidenced by our strengthened position with key customers and our revenue growth that has been clearly ahead of the industry. It's an exciting time to be in our industry, and I feel upbeat about where ASM stands in our market today. The semiconductor market is on a solid growth trajectory, driven by structural trends, such as digitalization and electrification. Third-party research firms, forecast the semiconductor market to reach a size of €1 trillion [ph] by the end of the decade. And AI is expected to account for a meaningful part of the expected growth. In addition, AI will require more powerful and power-efficient computing solutions to enable the next-generation AI chips, such as AI accelerators and high bandwidth memory, our customers are working on 3D device technologies and new materials, all of which will require more ALD and Epi steps. In logic/foundry, the transition from FinFET [ph] to gate-all around requires new ALD deposition for gate stack features, a trend that will increase with subsequent generation of gate-all around, followed by CFET [ph] by the end of the decade. We see a similar trend toward more ALD for memory products. DRAM is adopting more advanced logic processes as performance gets enhanced. We are confident these trends will keep the ALD market on a strong growth path towards our earlier communicated forecast of US$4.2 billion to US$5 billion by 2027. We target to keep our leading share in logic/foundry ALD and to step-by-step expand our position in the memory market. Another strategic priority is to expand our positions in silicon Epi. We expect Epi intensity to increase in the transitions to gate-all around. Our innovative technology has been accepted by more and more customers. In our other product lines, we are making selective investment to drive additional growth. A great example is the introduction of our new SONORA system in vertical furnaces, for which we won several new customers in the power, analog and wafer markets. Silicon carbide Epi is another attractive product line where we are well placed to expand our position as customers transition to 200-millimeter wafer size. To stay ahead, we are investing in our people. We are investing in R&D, and we are also investing in our infrastructure. A year ago, we announced the new site in Korea to double our footprint in R&D and also increase our manufacturing in Korea. And in Arizona, last December, we announced a major expansion for both Epi and ALD R&D. Lastly, we continue our focus on sustainability. The highlights in the first half of this year was the achievement of 100% renewable electricity for all of our global operations. Let's now move to the current market trends. Conditions in the semiconductor market continues to be mixed with a patch recovery in smartphones and PCs and ongoing weakness in automotive and industrial. Accelerating growth in AI is, however, driving increased wafer fab equipment investments in high bandwidth memory and in leading-edge logic and foundry. Momentum in the leading-edge logic/foundry segment is picking up pace, supported by the transition to 2-nanometer gate-all around. We have again solid gate-all around orders in the second quarter, up somewhat from the level in the first quarter. Our customers are reporting good progress and yield improvement in their pilot line activities. The start of high-volume manufacturing is still targeted in 2025 across our leading customers, although we already have some orders from customers who want to start initial volume manufacturing for part of their products by the end of 2024. 2-nanometer technology node offers significant improvement in device performance and in power efficiency. Our customers have been talking about strong demand for 2-nanometer from their own customers, including from AI chip makers. Based on customer traction, the gate-all-around [ph] transition would be a strong driver for ASM. As previously communicated, our served available market in logic/foundry will increase by some US$ 400 million for each additional 100k monthly wafer capacity as many new ALD layers are required in gate-all-around devices. In silicon Epi, we have been selected for various applications by all three leading customers compared to one leading customer we had in the previous FinFET nodes [ph] A significant portion of gate-all-around orders in the second quarter consisted of Intrepid [PH] ES Epi tools for gate-all-around, reflecting our expanded customer base. In R&D, we are strongly engaged with the next-generation version of gate-all-around for both ALD and Epi. In this next generation gate-all-around, we are working on advanced applications, such as for widening adoption of backside power distribution, our metal ALD and on selected ALD. As Paul mentioned, memory was the largest segment of our bookings in Q2. All customers are ramping up manufacturing of high-bandwidth memory to support the surging demand of complex AI computing. The high-speed DRAM chips used in this HBM stacks require high-k metal gate ALD technology in which we have the leading position In the coming years, the DRAM industry will move to 4F squared, which we expect to result in additional ALD layers in the gate stack and increasing FE requirement. While revenue was up in Q2 from a low base, demand in 3D NAND continue to be relatively soft in the second quarter, following the cuts in investment and production last year, supply/demand conditions are gradually improving, except for technology investments, spending levels continue to be low. Next, let's talk about China. Our cost of sales in China were still at a good level, but lower than in Q1. If you look at the different segments within China, the drop in sales was mostly explained by the mature logic/foundry segment. For China as a whole, we think that Q1 has been the peak for now. Several customers - several customers seem to be moving into a phase of digestion. We expect both bookings and sales in the mature logic/foundry segment in China to further decrease in the second half. The power/analog/wafer segment, excluding silicon carbide, already started to slow down from the end of last year, not only in China but also globally. The general trend in this segment continued to be soft in Q2 and is likely to remain so for the rest of the year. Despite the weaker market conditions, we actually booked very decent orders in this segment in Q2, thanks to multiple tool orders from new silicon power customers in China. Finally, silicon carbide Epi. Conditions in this market continued to weaken in the second quarter, and we now expect the silicon carbide Epi market to be down for the full year. While we've reduced our expectations for 2024, we believe that our silicon carbide sales are still on track for double-digit growth this year as we continue customer pool. In addition, long-term prospects for this business remains solid. We believe the slowdown in the EV market is only temporary and will pick up again as EV penetration rates are expected to increase in the coming years. We continue to have good traction in R&D engagement and new customer evaluations. We're reported on another new tool selection in the Q2 press release for a major 200-millimeter silicon carbide fab projects in China. Moving on to the outlook. As reported in our Q2 earnings press release, we expect sales in the third quarter to further increase to a range of €740 million to €780 million. We further expect sales in the second half to increase by approximately 15% compared to the first half. This means that we are on track for another year of healthy growth. We expect a strong increase in second half sales from the leading edge logic/foundry segment, predominantly driven by higher gate-all around related sales. We also project memory sales to increase strongly, both in the second half and for the full year. As mentioned, China sales are expected to be somewhat lower. Looking at the midterm, we are confident about the targets we provided in our Investor Day last year for both 2025 and 2027. While it's too early to provide more specific guidance, we expect 2025 to be a good year for ASM. The growth in wafer fab equipment in 2025 is expected to be stronger than the slight increase that's forecast for 2024, driven by a further recovery in the memory market and increased investments in 2-nanometer. This concludes our prepared remarks. Let's now move to Q&A.
Victor Bareño: We'd like to ask you to please limit your questions to not more than two at a time so that everyone will have a chance to ask a question. Okay. Operator, we are ready for the first question, please.
Operator: Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Sandeep Deshpande with JPMorgan. Please go ahead.
Sandeep Deshpande: Yeah, hi. Thank you for letting me on with the question. So, my question is, you're seeing strength in the memory market in terms of orders at this point. Is this strength based on what you're hearing from your customers likely to continue into the future quarters of the year? Or is this going to get replaced by GAA, which will be an important driver for you into 2020, 2025? And then I have a quick follow-up. You have this holding in ASM Pacific. I mean can you clarify, I mean, having now become CEO, where this holding stands in your view? Is this a core holding? Or is this a financial holding? Thank you.
Hichem M'Saad: So to answer your first question, Sandeep. Thank you very much for your question. And it's really nice to have met you a couple of months ago. For - we see that the DRAM is really driven right now by high bandwidth. And the high bandwidth DRAM is actually goes hand in hand with the [indiscernible] So we don't see a mess up in DRAM orders in the future. But at the same time, we can expect to see some lumpiness from time to time. But I think the DRAM, especially the high bandwidth is going to grow in the future as the gate-all-around technology node is going. As far as your question about ASMPT, I really have no comment right now. I'm just started to become a CEO for ASM for a couple of months right now. I didn't really have the time to review it any further. It has been a financial holding for us right now, and I don't see any change from this point in time.
Sandeep Deshpande: Thank you.
Operator: The next question is from Andrew Gardiner with Citi. Please go ahead.
Andrew Gardiner: Good afternoon. Thank you for taking the question. I just had one sort of high-level question to some of the points you were just making at the end there, Hichem, regarding the outlook. If I look back over the recent quarters, your quarterly revenue guidance has proven pretty conservative. You've regularly been generating quarterly revenue towards the high end, if not above the guidance ranges that you provided quarter after quarter. And again, with yesterday's release, you've sort of edged up the 2024 revenue targets again. And now you're -- with that, you're within touching distance of a few percentage of the lower end of your 2025 targeted range. And then if I commented the other way, sort of a top-down basis, your WFE assumptions are looking rather conservative at this point relative to, I think, anything -- anyone in the financial community looks at or indeed the industry analyst community looks at. So I hear your point that you're confident there, but isn't it going to be time soon to raise that 2025 target? Isn't it simply looking too conservative given the way the industry is going and the market share gains that you guys in particular are making?
Hichem M'Saad: I think for this question, I'm going to let Paul really give you the answer.
Paul Verhagen: Yes. Andrew, thanks for the question. Yes, as Hichem already said, the prospects for next year, we believe look good, of course, with the trends that we see happening in gate-all around, which of course will ramp up in the course of next year with three customers, which compared to the past typically advanced node was with one customer. So that in itself already is great. Of course, benefits we see continued strong demand in memory, particularly DRAM, with some lumpiness from quarter-to-quarter. As Hichem already indicated that Q2 was very high, but also pretty lumpy. So although we expect continued good amount, it might be somewhat lower than Q2, but still good. So also in other markets, power/wafer and analog is lower than last year, but we saw good demand and hopefully might, let's say, pick up somewhere in the second half. It's still too early to tell, to be honest. At the same time, we see a drop in China, which is still a little bit hard to tell on how much that will be, but there will be a level of normalization and digestion. We see it already in mature logic/foundry in our order book. So why do I say all this? There's still quite some variables in place. And we believe it's too early to actually touch our guidance. I think we try to be realistic. You call it conservative. We believe we try to be realistic. You're right to be many times at the high end of our guidance and sometimes marginally exceed it. But for now, we believe that everything that we know with all the moving parts, that three to €3 billion to €3.6 billion is still the right guidance for next year. And maybe just, I'm 100% sure you know, we have increased it, of course, because of LPE, because our initial guidance that we disclosed in '21 was €2.8 to €3.4. So increase it to €3.0 to €3.6. And again, giving all the moving parts, we believe for now that is still the right guidance for '25.
Andrew Gardiner: Understood. If I could follow up quickly. I mean you mentioned some of the moving pieces there. In terms of the potential headwind, would you characterize China as the biggest risk there, where you may not have the visibility you have elsewhere with advanced memory and advanced logic?
Paul Verhagen: Definitely China will be one of them. Given, as you know, what we have said, exceptional levels of investments. We believe in '24 - sorry in '23 and even in the first half of '24, because already in the second half of '24, we see a decline and that might further continue into '25. So, yes, China is for sure a headwind. At the same time, as you know, our strategy is built around growth and leading edge logic/foundry, gate-all around, and high performance and memory, which shows very good and healthy drivers for continued growth. So they will more than compensate. Of course, a drop in - a drop in China silicon carbide is still somewhat uncertain. As Hichem said, we expect actually the market to be down this year, although we still expect double digit growth. But the question, of course is what will happen next year with the EV markets? It might come back. It might come back towards the latter end is still a little bit the detail that could be another, maybe small heft wins compared to this year, but I don't know yet. Most likely case it will be growth, but again, too early to tell. But for China, based on everything we see and hear today, yes, China is for sure, almost sure, I should say down compared to this year. Yes.
Andrew Gardiner: Thanks very much, Paul.
Operator: The next question is from Janardan Menon with Jefferies. Please go ahead.
Janardan Menon: Hi. Paul, just to follow on, on that question and answer you gave. I mean your initial guidance for 2025 was in 2021 and you added the LPE numbers to that. But in 2021, China was extremely low, and I would assume that even with the decline that you're assuming in 2025 or with a moderate decline, it would still be much higher than the assumption you made for China in 2021. So I'm just wondering -- I'm just going back to the same question, which is given the whole AI wave with HBM coming up so strongly, which is probably unexpected, even when you gave the 2023 Capital Markets Day. Should there not be some upside on the 2025 guidance if things stay at this level into next year?
Paul Verhagen: Thanks for the question, Janardan. Of course, we've given a pretty wide range for '25, 3 to 3.6. And of course, pluses and minuses, we hope that they can be incorporated in this range. So based on everything that you say, you might maybe expect us more to be towards the higher end of range compared to the lower end of the range, that could be. So there, of course, is still a difference because, again, it's €600 million difference. That's not a small number for us. So if, let's say, the - which we expect gate-all around buildup of capacity will continue as we see it today. If memory continues to grow as we think it will be today. And even with the decline of a larger China, indeed, I think you're right, I think it's a fair assumption. We still believe that 3 to 3.6 is for now the right range. But yes, of course, the more tailwind we will have in terms of markets and growth that we might not have fully taken into account in '21. The more likely it might be that we go, let's say, more towards the higher end of the range. But even that, I don't want to guide. This is no guidance. Our official guidance is 3 to 3.6. A lot of things can still happen. It's still early days, but we are confident about our position in the market and Hichem already indicated confidence about next year based on everything we see here today.
Janardan Menon: Understood. Thanks for that. And my second question is just on the gate-all around, 2-nanometer gate-all around orders, you've said that you got a higher order from that in Q2, but in previous quarters, you said that you expected pilot orders in Q1 and Q2, and then the high volume orders from Q3, Q4. I just want to clarify, did you get any high volume orders in Q2, or was it still pilot orders? And you also said that some of the orders that came were more on the epitaxy side. So is it that we still expect quite a bit of the ALD high volume orders through Q3 and Q4, especially from the foundry side? Thanks.
Paul Verhagen: Yeah. It's a little bit hard to tell, Janardan, simply because we - orders don't come in earmarked pilot or HBM. I mean, maybe to put things in context, we have seen already - we had last year Q3, you might recall, we had higher orders than anticipated, and it was to a reasonable extent driven by gate-all around, which were partially pulled in from Q4. But anyhow, already four quarters in a row now, solid orders from - for gate-all around, both ALD and Epi. In this quarter, we've talked about it. We believe there will also be some HBM [ph] orders, and going forward it will be more and more for HBM, because if you look at the four quarters also we've received, if you accumulate that, you don't disclose the number, but that's a decent number. So we think that most, if not all, of pilot has been received. But, yeah, we never, again, we never know that they're precise. But that would be, I think, a fair assumption.
Hichem M'Saad: Let me add something here and provide you with a broader perspective. I think for - as opposed to FinFET gate-all-around has three customers, and FinFET was really, for most of the time it was just one customer. So the order has taken a long time because really depends on the customer roadmap and where they're going to be in HBM. And we have seen the past few quarters, there's plenty of N-2[ph] or gate-all around order. So we see, I mean, for this quarter, Q2, there's actually a mix, like what Paul has mentioned, mix of pilot and HBM order for N-2. So we feel confident that this is really what's happening. Most of the orders are actually customers getting ready for HBM in 2025, and we expect right now that 2025 is really going to be the start of the gate-all around HBM technology node.
Janardan Menon: Understood. Thank you very much.
Operator: The next question is from Alexander Duval with Goldman Sachs. Please go ahead.
Alexander Duval: Yes, many thanks for the question. I saw in your presentation that you upgraded your expectations, the number of logic devices to be driven by AI. I wondered if you could talk a little more about what specifically drove that? And longer term, to what extent you see that impacting other areas of the logic that could benefit ASM?
Hichem M'Saad: So I think for AI, AI is driving two types of chips. It's driving both logic and also driving the memory. So for logic you need to have really high performance, mainly for high performance chips, which is the 2-nanometer technology node, but also with the 2-nanometer technology node, you have also higher efficiency and lower power consumption. So 30% actually lower power consumption than FinFET. So that's a huge. And as you know, semiconductors are eating more and more energy. So that's on the logic side. But also for each AR chips you have many, many HBM or high bandwidth memory DRAM. And those high bandwidth memory DRAM, they are high performance. And when you say high performance, it means that they have more and more logic cores. So the logic part of it, really high performance, needs lots of ALD and Epi layers. So in DRAM, high bandwidth memory DRAM, we have lots of ALD and you have lots of Epi. And for the gate-all around, because of the just the gate-all around structure by itself, that needs more ALD layer for dipole layers, for phase shifting and so on and so forth. I mean, even in the back end of line you have actually in midland of line you have metal ALD and so on and so forth. And also at the same time for the logic part, for the gate-all around, Epi intensity is higher, because right now what happens is that actually the channel width is defined by Epi for the first time before in FinFET, the channel is being defined by etch and litho. Now actually for gate-all around Epi defines the channel. And you have like five to six layer of silicon, silicon germanium superlattice. So we see, you know, for both memory and for both logic, which constitute an AI chip, both ALD and Epi intensity increase and that's where we play right now.
Alexander Duval: Thank you very much.
Operator: The next question is from Francois Bouvignies with UBS. Please go ahead.
Francois Bouvignies: Thank you very much. My first question would be on this SEMICON West 2. I mean you had a few slides and discussion and you described the first generation and second generation of GAA with epitaxy getting another step-up in the second generation. And I was wondering about your market share in epitaxy specifically as you move forward. Because when you look at your forecast, I mean, and your epitaxy road map, it looks like, like you say, you're going to move your market share from 15% to 30% in a matter of 2 years, which is, I think, unprecedented to gain so much market share in such a short period of time for the industry. So given that you compete with one very important players, AMAT, I was wondering how you think about the market share, your market share in epitaxy specifically as you go to Gen 2, especially in the context where AMAT is, I guess, looking at this carefully. And at the SEMICON West you talk a lot about this integrated systems where they can bring different proposition. And I was wondering what you think about this value proposition versus your, I guess, because you don't have that. And sorry, it's a very long question. Thank you.
Hichem M'Saad: Yes. Thank you very much for the question, and it's nice that you saw my presentation in SEMICON. I think that's for Epi. As I mentioned right now, [indiscernible] is the first technology known for gate-all around. And the second generation is going to be 1.6, 1.4, and third generation would be 1.0, which most likely was going to be CFET [ph] So as you go to next generation gate-all around, two things will happen. Shrink, shrink is going to happen. So from that point of view, you need more Epi is happening there because especially in the contact area, when you have a very small web having better contact will be the best and Epi has a very intimate contact instead of having contact with CVD layer there and so on. Actually, Epi will have more and more intensity, just I think from the contact point of view, we see that. And also, you're going to have, for some customer, you're going to have like more superlattice layer instead of having four layers, you might go to 6 and so on. And when you adapt with the CFET, actually, that's - CFET is actually double gat-all around and [indiscernible] PMOS, so actually, you increase the number of Epi layer from that point of view. I think that for Epi, I'm not really -- we -- for Epi what we have done in Epi the past few years is really bringing innovation to this technology, which haven't seen innovation for many, many years. And I think with the innovation that we have brought in the reactor technology, customers have seen the benefit of it. And that's how we've been able to penetrate and provide value to our customers. As I mentioned before, I mean, we -- as I said, we have built on the premise of breakthrough technology, innovation and relentless research and really try to provide something that's unique value to the customer. So we see that we have good technology being adopted by all three logic/foundry players right now. And we continue innovation. I mean, we're really not sitting on our lowers [ph] and we have very much respectful competition, but we need to be close to our customers. We need to continue innovation. And that's what we see. And we think that our position is good and as long as we're providing value to our customers.
Francois Bouvignies: Great. Thank you. And if I may ask the second one, it will be shorter. About China, I mean do you still -- is the memory a big driver of China demand as well. I was wondering if you were selling a lot to China memory?
Paul Verhagen: Maybe in China, we serve multiple segments. As you know, memory is one of them, but actually not a large one, to be honest. We've said it multiple times, of course, we see some growth in China, but also in memory, but our key play in the last quarter's has been where we've seen what we then call exceptional growth with a mature logic/foundry, which is now actually gradually going to reduce and normalize more, we believe. Then, of course, last year, we've seen very good growth in the power/wafer analog, but this year, it will be less. But actually the last 2 years, we've seen very strong growth in power/wafer analog. And of course, we have consolidated silicon carbide business, which we did not have, of course, before '23, which was also mostly China. So adding that together, you get what you get what we have today. But the biggest play that we used to have in the last, let's say, 5, 6 quarters was in mature logic/foundry. Going forward, I think the focus will be maybe even more on the power/wafer analog and on silicon carbide and to maybe to a lesser extent, on mature logic/foundry given, again, the exceptional levels of investments we've seen and, of course, also some memory there, but there we are relatively small.
Francois Bouvignies: Thank you.
Operator: The next question is from Stephane Houri with Oddo BHF. Please go ahead.
Stephane Houri: Yes, hello. Thank you for taking the question. So I have two, in fact. The first one is about the gross margin because there is indeed some volatility around the gross margin, and we were expecting a kind of normalization, but maybe more happening in the second half with China, so with China going down. So can you maybe explain what changed in the mix during this quarter? And how low can the gross margin grow if China goes down in the mix? And I have a follow-up.
Paul Verhagen: Yes, good question. Thanks. Yes. I mean, as we've said, and you know, of course, multiple times is that let's say, more China, let's say, on average means higher margins, less China typically means a little lower margin, simply because pricing is somewhat different in China compared to other markets. And I think the most important one is lower volume per customer. And the second most important one is that more mature products is sometimes high throughput compared to, let's say, the initial launch of the product so you can command more value from your customer. Yes, it's hard to say. It depends, of course, ultimately, on the mix in China. It depends on the mix outside of China. We have quite a few products each of their own margin profile, different layers with their margin profile, different customers. So yeah, the best guidance. Again, and I know that's not a very satisfying answer, but is this 46% to 50%. I mean, if China would normalize? Yeah, I think it will be very hard for us to get north of 50, to be very honest. I've said it more times. It's something you guys might not want to hear. But I think that is, at least for, as we see it today, the most likely scenario that with a more normalized China, it will be hard to get it structural above 50. And I don't think that we're there to achieve that. Could it be sometimes a quarter if the mix really is really very positive, that all the coins fall to the right side? Yeah, it could be, but definitely not structural.
Stephane Houri: Okay, thank you for that. And then the follow up is about the recent, let's say noise about restrictions, further US restrictions in China. How do you react to that? What is your position and how could it affect your business? Thank you.
Paul Verhagen: Yeah, I wish we knew. There is indeed a lot of discussion now on additional control. So very likely they will come. We don't know precisely when, but somewhere, maybe in the coming month or two months or three months, we'll see. Difficult to speculate. I mean, you see in the newspapers that there is discussions between various governments going on and that all kinds of measures are being mentioned, hopefully not implemented. The one is the foreign direct products rule. That would be the most severe if that were to happen. Another thing that could happen is that more fabs will be classified as advanced fabs. Another thing that could happen is certain applications might be stopped. I mean, yeah, we've seen these things in the past as well, but, yeah, it's really - we really don't know, if we would know, would tell you, but we really don't know. And maybe to give you some comfort, at the end of the day, our growth strategy is not based on China. Of course, China helps, and China has been a good help last year, but our growth strategy is based on leading edge, logic/foundry, high end memory. That's where we see the inflections happening in the coming years. That's where we see growth and that's what we need to deliver on our guidance. And in China, of course, we try to focus on in a selective manner, is more than more, is silicon carbide, is power/wafer/ analog, which is more than more, and to a limited extent, where possible, of course, mature logic/foundry, because we do believe that if new export controls were to kick in, then it is likely maybe to hit mature logic/foundry. But again, we don't know. It's too early to speculate. We don't think that power/wafer/analog is targeted or silicon carbide, but even that might have. We just don't know. I mean, so I don't want to speculate, but we're on top of this and ultimately we will be on the receiving end, unfortunately, and we'll see what it means. But again, it's for us, not a super major issue, if anything will come, because our growth strategy is focused on the areas I just mentioned.
Victor Bareño: Thank you, Stephane.
Stephane Houri: Okay. Thank you.
Operator: The next question is from Ruben Devos with Kepler Cheuvreux. Please go ahead.
Ruben Devos: Yes, good afternoon. Thanks for letting me on. I just have a first question regarding the TAM basically for single-wafer ALD and silicon epitaxy. I understood that, obviously, for next year, you keep your targets. But for the TAM, how should we be looking at that? I mean, you've had more feedback from the market since the Capital Market Day in September last year, so nearly a year ago. Of course, AI applications, it's been a relatively young and emerging markets. But are there any comments you can make on the TAM for single-wafer ALD and silicon Epi? And how that may look somewhat differently now compared to September last year?
Hichem M'Saad: Yes. Thanks for the question, Ruben. I mean, it's more or less the same answer that I gave before on the overall guidance we gave for next year. Of course, there is positive and the negative. There is a lot of moving parts based on also our Capital Markets Day in 2023 so last year, in which we also have taken into account quite a lot impact of AI already. We have basically reconfirmed these stamps [ph] and also today we don't see a reason to change that. So I believe by heart, ALD was €3.1 billion to €3.7 billion and Epi in '25, I think 1.9 to 2.2 or 2.3. Given where we were last year, where we reconfirmed that we were actually on track, and that these stamps seem to be reasonably well projected, we see no reason at this, at this stage to change that.
Ruben Devos: Okay, fair enough. And then just on the silicon carbide epitaxy, I think the wording is somewhat different from the prior release, but my interpretation is that it reads somewhat more bullish. Could you maybe talk about changes in ordering behavior in the past three months and how you manage to onboard new customers? And just more generally speaking, there's been, of course, a lot of news from automotive around the disappointing end demand for EV's, which has even triggered some carmakers to prioritize ice engine car production. Again, what do you make of these developments and how should we think about the end market size? So basically, your growth trajectory beyond '24 for silicon carbide epitaxy?
Hichem M'Saad: So I will answer this question. We remain confident about silicon carbide technology in the future. Yes, we do see a downturn in 2024 because of slower adoption - slowdown in adoption of EV, especially in the States. But I think medium term and long term EV adoption is happening and is going to continue. So we are very optimistic and confident about the growth of silicon carbide. The second thing about silicon carbide, I think what we have done this year is actually we have released a new product on 200-millimeter, which is a clustered single wafer product. We've seen lots of adoption by our customer, both in China and outside of China. That's why we have double digit growth in silicon carbide market in 2024, even though actually the market is going down. So we are confident about the market, we are confident about our technology. And I think in this power electronics market, which ASM has been a player for the past 40 years, on silicon power electronics market, we see these ups and downs. It's part of the technology. I mean, and we have to live with it. But we need to come stronger when the actual [ph] comes. And I think that's what we have done in 200-millimeter.
Ruben Devos: Okay. Thank you.
Victor Bareño: Thank you, Ruben.
Operator: The next question is from Didier Scemama with Bank of America. Please go ahead.
Didier Scemama: Thank you so much. Good afternoon, everyone. A couple of questions and before - very boring questions for Paul. Just wanted to clarify, so you said SG&A this year would be flattish year-over-year. Is that excluding the €8.4 million one-off from Q2? And do you said it's going to grow 10% to 20%, which is quite wide. So do you expect the capitalized R&D expenses to pick up dramatically in Q3, Q4? Because you were guiding them to be up in Q2 and they were pretty stable, I think. So is that the main culprit? Also on gross margin, I'm glad to hear that being above 50% is going to be tricky without China. But equally, I mean, do you think like 48% is kind of a floor now for your business, even if China disappears or at least declines materially in the second half? And I've got a follow-up for Hichem on the technology roadmap.
Paul Verhagen: Okay. Thank you, Didier. Maybe first on SG&A. What we have actually guided from the beginning of the year onwards will be marginal increase up to 5%. And that's still the case. It's not flattish and much so where that came from, but must be misunderstanding, we've continuously said marginal up to 5%. And I think it will be around this 5% for the full year. Excluding indeed, this one-off tax charge related to accelerated divesting of certain shares. Then R&D, you're right, it's a big, big range. And you're also right that I already had expected in Q2 a higher increase in amortization. Actually, some of the projects that I expected already to close in May, so I have one month of additional amortization in June, did not happen. They are closed by now. So it will start in July. So in Q3 and Q4, you will see a pretty significant step-up in amortization. And that is one of the reasons, not the only one, but one of the reasons why net R&D will increase between 10% to 20%. Maybe next quarter, I'm fine to narrow the range somewhat, but for now, I want to leave it at that, but there's also, of course, growth in gross R&D. As you've seen, I think, this quarter from 104 to 114, given all the opportunities that we see and that we're investing in to support our growth. But yes, as I said before, net R&D will increase faster than gross R&D because of this step-up in amortization because some projects have reached HVM [ph] and we're now selling these applications and have to start amortization. Then on the gross margin, it's 48% the floor, I wish I could say, yeah, I mean, I have to go back to 2022, where I think also not a lot, but some quarters have been below the 48. So it would be, I think, not right to say that it is a floor. So it could still be below, of course, in specific quarters. But if you mean for a full year, the safest bet would be around the midpoint, I guess, of the guidance, because I cannot give you any better guidance. If I could, I would, but it's pretty difficult.
Didier Scemama: 48% or do you mean like for the second half?
Paul Verhagen: No, no, just in general. This is not meant for this year. This just in general. That was your question, I believe, right. If China normalizes, could it be below 48? So the question is, yes, in certain quarters it could happen because we've seen it in the past as well. And then in general for a full year guidance yet, the best I can tell you is the midpoint of the guidance. But of course it could be high and low. I mean, that's why we have provided the range. And the answer - that I cannot narrow down this range given the margin profile of our products.
Didier Scemama: Thank you. For Hichem on the technology roadmap. What's your view on 3D DRAM? I mean, your predecessor, and presumably you are quite bullish on 3D DRAM. And we start to see now the few R&D papers and patent applications from many of your DRAM customers around 3D DRAM. So my question is a, what's the time frame of adoption? I think initially you were talking about '27, but it feels like it's a bit further out. And then b, what's the, what's the market for 3D DRAM? And that can utilize HBM. What sort of end markets are you thinking about?
Hichem M'Saad: Okay, thanks for your question. Didier. For 3D DRAM, I think if you look at the DRAM technology node right now, as I mentioned earlier, there is a shrinking from the cell structure from 6F squared to 4F squared, and that's going to happen in the next couple of years. So we see that 4F squared DRAM node is going to continue to '27, '28, and '29. And after that, starting in 2030 at the earliest, we see the transition to 3D DRAM. You mentioned like 3D DRAM 2027. Maybe, maybe you heard it. But I think for us it was really always that 3D DRAM is starting in 2030 at the earliest. Customer is actually working on the roadmap right now on 3D DRAM because it's newer cell architecture. So we need to start very early to do some R&D. And we are engaged actually with all players on this, but I think the HVM part will start at the earliest is 2030.
Didier Scemama: Okay, thanks very much.
Victor Bareño: Thank you, Didier. Can we have the next caller please, operator?
Operator: The next question is from Timm Schulze-Melander with Redburn Atlantic. Please go ahead.
Timm Schulze-Melander: Great. Thanks for taking my questions. Actually, my first one is a follow-on from Didier's question around that roadmap for DRAM, probably a question for Hichem. Just if you could help with some color around the market opportunity and that kind of served or target available market, how that changes from 6F squared to 4F squared. And then admittedly very early days, but is there any kind of scaling of what that might be at 3D DRAM? And then I have a follow-up.
Hichem M'Saad: I think if you look into, you go from 6F squared to 4F squared. That's mainly shrinking of the cell structure, but also you see some increase in ALD intensity. I think part of it is because the lower capacitance happens and higher leakage. So you need some different ALD layers with the low k value, etcetera, etcetera. And when you go to 3D DRAM, which it's a totally different structure. There are two things happening when you go to 3D. By definition, you're going to have a very high aspect ratio gap fill, so that we see lots of ALD layers happening for gap fill. The reason for it is ALD has very conformal film, so that those high aspect ratio feature would tend to favor ALD. Same thing that really what happened in 3D NAND. I mean, you see many ALD gap fill opportunity at 3D NAND. The same thing is going to happen for 3D DRAM. One big difference in 3D DRAM we see is actually in the Epi part of 3D DRAM. I think the structure is actually going to go to silicon, silicon germanium. So if you go and you look at the 3D NAND, you know you have ONO [ph] structure which is oxide nitride, which mainly deposited by PECVD. In 3D DRAM, you're going to have lots of channel film silicon, silicon germanium. So 100 to 200 superlattice structure, and those will be actually epitaxy. So the growth in epitaxy and 3D DRAM will be very significant from that point of view.
Timm Schulze-Melander: Great. That's very helpful. Thank you. And maybe just a longer-term question for Paul. When you referenced the profitability of China, one of the things you talked about is how tools have developed since their initial insertion and that, that allows you a better profitability point. Just as we think about your business, very big picture, China going down, gate-all around high bandwidth memory going up and that mix, you're saying with China coming down makes that 50% gross margin level a tough one to breach. If you roll forward sort of 5 or 8 years, does that picture change maybe as the product set matures and pricing improves on your gate-all-around and high bandwidth memory chipset. Thank you.
Paul Verhagen: Yes, it's a good question. And of course, we will try, of course, what we need to do to improve margins, of course, going forward. It's too early to tell where we will be at that moment in time, which will also depend on the mix. So if the products, of course, with a better mix will further increase relative to today. That for sure will also be helped. So yes, I'm not saying no. I'm not saying yes, it's too early -- as I said, I'm looking at a wider range of margins than you guys look at from higher to lower than the guidance we've given. But we are focused on margin because margin feature R&D, we [Technical Difficulty] on to come with differentiated propositions to have good margins into the market and after margin that we can continue to differentiate. So that's the philosophy that we tried to do -- but again, too early to tell how this will develop in 5, 6 years from now.
Timm Schulze-Melander: Okay. And maybe just one quick one. Was the book-to-bill above one in logic/foundry across your business in 2Q?
Paul Verhagen: In total, it was. But I don't know it by heart, to be honest. No, I would really have to look at the numbers. I don't know by heart. I'm sorry, Timm.
Timm Schulze-Melander: All right. Thanks for the help. Thank you.
Victor Bareño: I'm afraid we are running out of time. We have time for one final question. There are still more callers in the queue. So if you didn't have a chance to ask your question, please contact us after the call. Operator, can we go to the final question. Operator?
Operator: The final question is from Robert Sanders with Deutsche Bank. Please go ahead.
Robert Sanders: Yeah, thanks for squeezing me in. Just on the HBM orders, are those for delivery in 2025 or '26. I guess the reason I'm asking is it does seem like most of the greenfield HBM fab won't be ready for equipment until 2026. So I'm just wondering if people are ordering earlier for 2026 greenfield? Or these are just conversions that are happening? And related to that point, I'm just sort of interested to understand a bit more about the high-k metal gate transition. It seems to be quite correlated with DDR5, but I'm just trying to understand if it's DDR5 correlated, you're already kind of 40% of the way through the transition? Or are you, in fact, much less of the way through the transition because maybe high-k metal gate is not used in mobile or PC? Thanks a lot.
Hichem M'Saad: Yes. On -- let me take because we did not fully -- the line was breaking up, but I think the first question was on HBM orders, I think up for delivery in '24 or '25 orders today. I think a reasonable chunk delivery is likely to be in '20 -- so next year '25% next year, so '25. There might be some of that for sure also in this year. But I think a reasonable chunk given the lumpiness of what we received in Q2 is likely to be for delivery also to a reasonable extent in '25, but also some in '24. I'm pretty sure. I don't know the delivery dates by heart, of course, but that's the most logical assumption. Then the last part of your question, we couldn't hear because of -- no, there was some disturbance in the line. So can you repeat that?
Robert Sanders: Yes, it was just about high-k metal gate penetration. Can you just run me through how far along high-K metal gate is in terms of penetrating the DRAM footprint? Are we in the early innings? Are we halfway through like DDR5 and just checking if you can hear that as well?
Hichem M'Saad: So I think I will answer this question. For high-k metal gate for in memory, I think if you look into any high-performance memory right now, the DDR5 is one of them uses high-k metal gate. So it's not in the first inning, maybe like halfway. I think the adoption is there. It's getting more and more. We see it with every technology node, I think we're going to see more and more adoption of high-k metal gate ALD. And also HBM memory is actually -- is taking that in growth. So any high-performance DRAM being HBM or otherwise actually adopting high-k metal gate.
Robert Sanders: Got it. Maybe I could just squeeze in one more question, which is just about the entity list. The U.S., your competitors seem to be alleging that Dutch and Japanese companies are somehow favored in China. Are you conforming to the U.S. entity list, for example, entities like YMTC, are you able to ship to them? Or do you have your own entity list that's driven by your own government? I'm just trying to understand if there's any credibility to this idea of Dutch, Japanese companies having an advantage in China? Thanks.
Hichem M'Saad: We are also the same entity list as our, let's say, American peers. So there's no difference. Actually, the Dutch and the Japanese don't have the concept of entity list. But for us, it doesn't really matter. The U.S. regulation is extra territorial powers. And we also cannot, let's say, I you say, differently, we have to adhere to the same entity list as our U.S. peers. So no difference from that point of view.
Victor Bareño: Thank you, Rob.
Robert Sanders: Got it. Thanks.
Operator: There are no more questions registered at this time. I'll turn the conference back to the CEO for any closing remarks. There are no more questions registered at this time. The conference is back to the CEO for any closing remarks.
Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.+
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