Good day, and thank you for standing by. Welcome to the ASM International Q3 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Victor Bareño. Please go ahead.
Thank you, operator, and welcome everyone. I'm joined here today by our CEO, Benjamin Loh, and our CFO, Paul Verhagen. ASMI issued its third quarter 2021 results yesterday evening at 6:00 P.M. Central European Time. For those of you who have not yet seen the press release, it is available on our website, asm.com, along with our latest investor presentation. Please let me remind you that this conference call may contain information relating to ASMI's future business and results in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to our company's press releases, reports, and financial statements, which are available on our website. With that, I'll turn the call over to Benjamin Loh, CEO of ASMI.
Thank you, Victor. Thanks to everyone for attending our third quarter 2021 results conference call. I hope you're all safe and well. First of all, I want to take the opportunity to thank our investors and analysts for your participation in our Investor Day last month. We were very happy that many of you took the time to join us through the webcast or in person in Amsterdam. The agenda for today's call is as follows. Paul will first review our third quarter financial results. I will then continue with a discussion of the market trends and the outlook, followed by our usual Q&A session. Paul, over to you.
Thank you, Benjamin, and thanks once more, everyone, for joining the call. Let's now go through the Q3 results. In the third quarter of 2021, our revenue increased to EUR 433 million, up 5% from the second quarter. Compared to the third quarter of last year, revenue increased 38%, both at constant currencies and on a reported basis. Revenue in the quarter was slightly above the top end of our guidance of EUR 400 million-EUR 430 million. Spares and services grew 7% at constant currencies. Our equipment revenue in the third quarter increased 48% at constant currencies year-on-year, and were for the larger part driven by strong ALD sales.
By industry segments, revenue in the third quarter was led by Foundry, which reached a new quarterly record, followed by Memory and then Logic. Combined Logic/Foundry increased sequentially and continued to account for the largest part of our sales. Memory sales decreased sequentially but were still at a solid level and showed year-on-year growth, primarily driven by record quality sales in DRAM. Gross margin of 47.2% in the quarter was lower than last year's margin of 49.9%, which was impacted by an exceptionally strong mix and slightly down from 48.1% in the second quarter. SG&A expense increased by 26% year-on-year. Net R&D expenses on a reported basis increased by 11% compared to Q3 last year. Gross R&D, excluding IFRS tax and impairments, increased by 20%.
Below the operating line, results include a currency translation gain of EUR 13 million, and this compared to a translation loss of EUR 2 million in the second quarter and a translation loss of EUR 14 million in the same quarter last year. As a reminder, we hold the largest part of our cash balances in US dollars, and the currency translation differences are included in our financial results. Income taxes increased to EUR 25 million in Q3 compared to EUR 14 million last year. We still expect the ETR for this year to be high teens%. Let's quickly say a few things over ASMPT.
The normalized results from investments, which reflects our 25% share of the net earnings from ASMPT, increased to EUR 28 million in the third quarter, up from EUR 19 million in the second quarter and up from EUR 6 million in the third quarter of last year. ASMPT reported sales of $802 million, up 20% compared to Q2 and up 70% from Q3 last year. Bookings amounted to $735 million in the quarter, down 22% sequentially, however, up 42% year-on-year. Now I'm going back to ASMI again. Our new orders in the third quarter were EUR 625 million, up 21% from the second quarter and, yeah, more than doubling, up 106% from Q3 last year.
We already pre-announced on September 28th that the order intake would amount to more than EUR 600 million in Q3 compared to our earlier guidance of EUR 510 million-EUR 530 million. Please note also that we've decided to stop providing quarterly guidance for order intake as of next year, as it has become clear in the last two quarters, and this actual order intake was significantly higher than guided, that is increasingly more challenging in the current environment to provide a meaningful outlook. We will obviously continue to report actual bookings as part of our quarterly results update. Now looking at the breakout in bookings by industry segment, Logic was the largest segment in the third quarter, followed by Foundry, and then power analog. Combined Logic Foundry bookings increased again to a quarterly record in Q3.
Foundry bookings decreased slightly sequentially, while the logic segment surged to a new quarterly record. Power analog bookings also increased to a new quarterly record high and were substantially ahead of the previous high of Q3 2023]. Memory bookings decreased compared to Q2 and were led by DRAM. Now turning to the balance sheet. Now we ended the quarter with EUR 525 million in cash, which is up from the EUR 465 million in the previous quarter. The increase was driven by strong free cash flow of EUR 98 million, which includes EUR 15 million in dividends received from ASMPT, and partially offset by cash spent on the share buybacks during the quarter. Free cash flow, excluding ASMPT dividends, surged from EUR 47 million in Q2 to EUR 83 million in Q3.
Next to the continued solid level of profitability, the increase in free cash was mainly driven by modest outflow of working capital of EUR 12 million in Q3, compared to an outflow of EUR 43 million in Q2. CapEx was EUR 17 million, and we still expect CapEx for the full year between EUR 60 million and EUR 80 million. During the quarter, we spent EUR 45 million in share buybacks as part of the EUR 100 million buyback program that we started on July 28. As of at the end of last week, this program has been completed for 70%. I'd like to conclude with the summary of financial targets that we shared in our recent Investor Day.
As we continue to drive growth through innovation, we target our revenue to increase to a range of EUR 2.8 billion-EUR 3.4 billion by 2025. This increase will be primarily driven by strong growth in our ALD and EPI business, in addition to healthy growth in our spares and services and selective growth in our PECVD and vertical furnace product lines. We expect the gross margin to range from 46%-50% over that period, depending on application mix and with cost efficiencies and operating leverage being the structural drivers. SG&A expenses will gradually decrease as a % of sales to high single-digit % by 2025. Net R&D, which is a key investment, is targeted at a high single-digit to low teen %.
We target operating margins of 26%-31% in the 2021-2025 time frame, and this should enable us to generate a strong free cash flow. As you most likely know, we kept our capital allocation policy unchanged. Investment in growth remains the key priority, with excess cash returned to shareholders. With that, I would like to hand back the call to Benjamin.
Thank you, Paul. Let's now look in more detail at the trends in our markets. It is clear that 2021 is a very strong year for our industry. On the back of robust end market demand and with parts of the market impacted by shortages, the global semiconductor market is now expected to grow by more than 25% in 2021. With a continuous strength in the second half, expectations for the WFE or wafer fab equipment market have also increased. We now expect WFE spending in U.S. dollar terms to grow by a mid- to high-30s% this year, up from high-20s to low-30s, still expected three months ago. Demand in the Logic foundry segment continues to be strong.
Next to ongoing expansion of the existing leading-edge node capacity, initial spending on the upcoming node also had a significant contribution to our logic foundry bookings in the third quarter. Our customers expect the upcoming node, be it 7 nanometer in leading logic or 3 nanometer in foundry, to be an important node that will enable many new advanced products in, for instance, high performance computing and 5G smartphones. We project a strong double-digit % increase in the number of ALD applications and layers going to these next nodes, and we believe we are well positioned to see further increases in our share of wallet with key customers. We expect advanced node spending in the logic foundry sector to remain a solid driver for ASM going into 2022. Memory spending is also on track for a significant increase in 2021.
A key driver for our memory business this year is the adoption of High-k metal gate ALD in DRAM. This is a key technology that enables greater power efficiency and improved performance of next generation DRAM devices, specifically for big data applications. As we discussed in earlier calls, our solution has been selected by all leading DRAM manufacturers. In addition, our R&D engagements for other new applications in memory, both in DRAM and in 3D NAND, continue to progress well, and we expect further increases in the contribution of memory to our sales when customers transition to the next nodes starting in 2022 to 2023. Of note, this quarter was also the record high order intake in our power analog business, as just mentioned by Paul. The power analog market continues to show a solid recovery following the negative COVID-19 impact last year.
Our strong momentum in power analog is also driven by the success of our new product introductions. For instance, we are seeing strong demand for our A400 DUO tool, our new high productivity vertical furnace for 200 millimeter applications, including from several new customers in China. If we then take a view, first view on 2022, it is still too early to provide forecast for next year, but we believe ASM is well positioned for continued solid performance in 2022. Based on our guidance for fourth quarter 2021, we expect to start 2022 with a record high order backlog. Next, I will provide an update on the supply chain and capacity. Regarding our own capacity, we believe we are in a good position.
As we discussed on previous occasions, we completed our new manufacturing facility last year, and this provided us with sufficient capacity for now, even with much stronger than expected growth in demand in the recent periods. At our Investor Day last month, we also announced that we have started the design work on the second manufacturing floor in our new facility, and we expect this second floor to be ready for production early 2023. This will further expand our capacity and will provide us with the flexibility to deliver on our 2025 growth plans. Looking at the supply chain, as we have already discussed in our call last July, conditions further tightened in the third quarter.
This was especially impacted by the lockdown measures and, as a result, reduced factory outputs in Malaysia, which is an important link in the supply chains in our industry. The fact that we were able to slightly exceed the high end of our revenue target demonstrates, again, very strong execution on the part of our team in close cooperation with our supply chain partners and customers, for which I want to thank them all. Recently, we have seen some improvements, but overall supply chain conditions are expected to remain tight in the fourth quarter. Meeting our customer requirements continues to be a key priority. Despite the supply chain limitations, we expect to achieve a higher sales level in the fourth quarter in line with our earlier statement. Next, let's briefly recap the key messages of our Investor Day last month. Paul already talked about our financial targets.
We aim to grow our revenue with a CAGR of 16%-21% in the next 5 years, with solid operating margins of 36%-31%. This growth will be clearly ahead of the WFE market, which is expected to increase with a CAGR of approximately 10% over the same period. Important drivers will be our ALD and EPI businesses, which are key technologies to enable the next generation semiconductor device. We talk about the strengths that set ASM apart, such as our network R&D model, our early customer engagements, and our vast experience and know-how in ALD materials. We also give you insights into our product differentiation, such as our broad offer of ALD solutions, our unique reactor designs, and our best-in-class film performance and cost of ownership in both ALD and EPI.
We provided a deep dive into the inflections on the technology roadmap, increasing adoption of 3D structures and new materials, coupled with traditional scaling, will drive many new applications in ALD, such as in High-k gate, VT tuning, EUV patterning, gapfill, ALD metals, and selective ALD. We expect ALD to remain one of the fastest growing segment of the WFE market with a CAGR of 16%-20% till 2025. In ALD, we aim to maintain a leading market share in excess of 55% by 2025, based on the continued leadership in the logic foundry space and an increase in our ALD memory share. EPI is another growth driver for ASM. EPI is a defining technology for the gate-all-around architecture in future logic foundry devices.
Combined with adoption in memory and structural growth in power analog, we project the EPI market to increase with a CAGR of 13%-18% during the 2021-2025 period. In part supported by our new, our recent new customer win in advanced CMOS, we target our EPI market share to increase from approximately 15% last year to more than 30% by 2025. We also detail the impact of gate-all-around, which will further increase the need for both EPI and ALD. On top of meaningful increases in the upcoming technology node, we expect that gate-all-around would drive an increase of $1.2 billion in our addressable market in advanced logic foundry by 2025.
Further, contributing to growth for ASM is our spares and service business, where we are moving from a transactional model to an outcome-based model, as well as selective growth in our vertical furnace and PECVD product lines. We also highlighted our increased focus on sustainability during the Investor Day. We showed many examples of steps we are taking to make our tools more efficient in terms of usage of energy and chemicals. We also announced our aim for net zero emissions by 2035, including scope 1, 2, and 3. As an interim step, we target to source 100% of electricity for our global footprint from renewable sources by 2024, which will already drive a 90% reduction in our scope 1 and 2 emissions. Finally, let's have a look at the guidance that we have issued with our third quarter press release.
For the fourth quarter, on a currency comparable level, we expect sales of EUR 470 million-EUR 500 million. Fourth quarter bookings on a currency comparable level are expected to be around EUR 600 million. With that, we have finished our introduction. Let us now move on to the Q&A.
We'd like to ask you to please limit your questions to not more than two at a time so that everyone has a chance to ask a question. Okay, operator, we are ready for the first question.
Thank you. We will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press hash key. Once again, please press star one if you wish to ask a question. The first question comes from the line of Stéphane Houri. Please go ahead.
Yes, good afternoon. Thank you for taking my questions. Actually, I have two. The first one is about the supply chain constraint, because you back in Q2, you said that Q4 would be higher than Q3, but not specifying how much. It seems that it's clearly higher than Q3. At the same time, you're saying that there is still some constraints. My question is to really understand if the supply chain constraints have gone a little bit lower or easier, let's say. If there was no supply constraints, how much could you do on a quarterly run rate? That's the first question.
The second question is about gross margin, because the gross margin has indeed gone down as you highlighted, but not so much. At the same time, looking at the evaluation tool account in the balance sheet, it has come down by only EUR 10 million. Does it mean that you have not realized the disposal of those evaluation tools, or does it mean that there are some that have come out and some that have come in? You know? Some clarity about that would be nice. Thank you very much.
Hi, Stéphane. I will answer the question regarding the supply chain constraints, and then maybe Paul can help with the question on the gross margins and the eval tools. When we look at, you know, the supply chain, you know, basically as we have mentioned in the prepared remarks, you know, during the quarter, we actually saw some tightening of the supply chain situation, primarily with our suppliers in Malaysia.
You know, as we enter into the last part of the year, you know, with the rapid, let's say vaccination program that they are putting in, we are, I would say cautiously optimistic that maybe as we exit 2021, things might be a little bit better in the sense that we'll there will be maybe more easing of restrictions, et cetera, as we enter into the new year. Now, having said that, one of the reasons why I think we are able to, you know, deliver also more in the fourth quarter or as we have guided, despite the fact that the supply chain constraints are continuing is, as we have explained to you previously, we have taken measures to try to mitigate that.
One of the measures, of course, is, you know, to try to early order as early as possible. That's one of the things that we have done as part of the COVID-19 learnings that we had from last year. The other one, of course, is again, as we have explained earlier, trying to qualify more suppliers. In that respect, we are seeing some, I would say, initial returns on that, being able to, you know, lock in our supplies or let's say orders, supplies earlier by giving orders earlier. Also I think, you know, even though we still need quite some time to qualify a lot of alternative suppliers that we would like to, but I think we are seeing some fruits of that.
That coupled with, I would say, a slightly improving maybe situation as we go into the end of the year gives us the optimism that we should be able to deliver more than what we have done in the third quarter.
Yeah, I'll take the question on margin this time. Yeah, on the margin development, first and above all, I think that I'm pleased to say that we have a healthy margin with 47.2%, which as guided came indeed in slightly lower than what we had in Q2. In the eval tools, there have been you know quite a few movements. As we already said, we expect in H2 higher sales than in the first half, which indeed is happening. We saw sales in Q3 to be higher than in Q2, having some impact on margin. Too, we also have new shipments into customer of new eval tools.
What you see is that the movement in the quarter of eval tools is very small. I think it increased by EUR 1 million or so. It's very small compared to year-end, and this increased by EUR 10 million. There are pluses and minuses, of course, in movement through sales and through new eval tools. It's also good to say already that also in Q4, we expect again, I think even higher sales of eval tools again than in Q3, which of course might impact margin a little bit. At the same time, I want to say that, yeah, eval tools is of course one element that impacts margin. Obviously, application mix and other elements also impact the margin.
It's always very difficult to give you precisely what the net impact of all that is. What we've seen at least in Q3 is as we guided is somewhat lower margin, amongst other because of the increased sales of eval tools. I hope that is clear. If not, then please-
Yeah. It is clear. Does it mean that Q4, you're guiding roughly flat gross margin? Would that make sense?
I don't think we guide the specific margin for Q4. What I can say for it is that of course, an increased level of eval tools will have a somewhat unfavorable impact on margin. That is only one element. There's of course other elements as well that will influence margin. What I can say is, of course, the new range that we have provided during our Investor Day, which is that we do think that the margin for the year, but I can also say for Q4, at this time, will be somewhere between 46%-50%.
Okay. Thank you very much.
Thank you. Next question comes from the line of Marc Hesselink. Please go ahead.
Yes. Thank you. First question is actually on client order behavior and your visibility there. You already stated that you're not going to disclose that anymore. Did it change so much? Yeah. Are clients completely different in the way they put in their orders? Do they do it more in bulky fashion? What are other things why you changed that? Then also related to that, because you have been building up such a large order book, when will that be converted into sales? Are those lead times much longer, or is it just a temporary effect that we now see that build-up and quite soon we should be more in the normal range again?
Just given the books are built, I think this year 1.25. That's really high. When will be more at the normal level? Thank you.
Hey, Marc. Thanks. I think maybe the easier way to answer would be to answer the second question first. I think as quite a number of analysts and investors have correctly observed, you know, based on our fourth quarter guidance, we are probably going to exit 2021 with a record high order backlog. Of course, as we have also explained previously, one of the reasons why the order backlog is increasing is, let's say, you know, due to the supply chain constraints. If there were no, for example, supply chain constraints, we could probably deliver more. You know, it's something which is difficult to quantify because the supply chain constraints are actually quite, I would say, widespread.
We just have to work, you know, whatever we can to try to make sure that we get the supplies that we need. As I've mentioned in the previous, let's say, question, we do this actually already from quite some time back by ordering earlier, and also by trying to work on qualifying alternative suppliers. Now, in terms of the orders that we are seeing, I think there is very strong demand. I think, you know, as we have mentioned in the prepared remarks, Paul has given some color that the combined logic foundry order intake for the third quarter was a record quarterly high. The order intake for logic was again a quarterly record high.
Finally, power analog was also a quarterly record high. We have seen very strong demand across multiple segments, and that is also leading up to, you know, the strong orders that we are getting. Of course, due to the supply chain constraints, this is manifested in the form of the order backlog.
Okay, still the why is it now then more difficult to forecast than it used to be?
Okay. I think, you know, we are seeing, let's say, probably more lumpiness in terms of orders coming. It has always been lumpy, to be first of all, to clarify. Orders coming in from our customers has always been lumpy because it really depends on, for example, their investment cycle. It's not like they split, you know, whatever they're gonna buy equally into four quarters, and then they just give us the quarters. No. It really is a timing on when is their investment. It has already been lumpy, I would say, pre-supply chain constraints. With, you know, longer lead times and, I would say, an overall supply chain constraint in the industry, I think this has become more lumpy.
We have also shared that, also in our second quarter earnings, that we do see some customers placing orders a little bit earlier, because they want to make sure that, you know, they get the orders in front of us. Because of these reasons, we think that it's kind of difficult, challenging for us to be able to provide, you know, with a proper, let's say, or accurate, guidance as far as orders, or order intake is concerned. As you know, we have like, you know, during the second quarter and the third quarter, had to revise and give a renewed guidance for our orders because they came in much higher than what we expected.
We also think that going forward, you know, we will just provide you with the revenue targets or guidance. Of course, we still have to report the bookings, as part of our earnings cycle.
Okay. Clear. Thank you.
Thank you. Next question comes from the line of Keagan Bryce. Please go ahead.
Hey, guys. Thanks for taking the question. Just two from my side. The first on High-K metal gate DRAM. I know you've talked about wins across all three major players. One of those customers has obviously been quite public about their adoption. I guess if I look at the market today, it still feels like High-K metal gate is still fairly niche. When do you expect to see a broader adoption of High-K metal gate for DRAM? And when you do you expect your market share, particularly in memory ALD, to meaningfully increase? Then my second question is perhaps a little bit longer term. You've done an operating margin to date of 29%, which puts you at the midpoint of your 2025 target.
Now, given you'll be close to doubling your sales base in 2025, I'm surprised not to see more operational leverage come through. I'd always thought that your lower margin versus, let's say, some of your bigger WFE peers was a scale problem, so surprised not to see sort of higher 2025 targets. What other variables may be limiting sort of your operating margin improvement into 2025? Thank you.
Hi, Keagan. Thanks for the two questions. I will take the first one, and perhaps Paul can give you more insight into the operating margin question. On high-K metal gate for DRAM, you know, the solution has been adopted by all the three major DRAM manufacturers. And it of course, as you correctly mentioned, it is used primarily you know to manufacture high performance DRAM devices, or let's say what we call high performance DRAM. And it's a smaller part of the overall DRAM market.
We also see some signs, especially this year, where we have had a fairly strong, I would say, business coming from high-K metal gate in DRAM, that the proportion of high-K metal gate DRAM is actually increasing. You know how far this will go in terms of broader adoption, I think this is still left to be seen. Primary usage of high-K metal gate DRAM is of course, you know, lower in terms of power efficiency and speed. You know, just to give an example, one of the applications that is driving that use is of course, you know, let's say, high performance graphics, where speed is important. That's one of them.
Again, we think that probably as the market find new applications for you know that requires faster speed, lower power and so on, we might see you know increasing adoption of High-K metal gate applications in DRAM. You know, that's more our opinion, and we still have to see what happens at the end user market. Paul?
Okay. I'll take. I think the question was on the midterm guidance between operating margin 26%-30%. I think what's important is that, let's first do the gross margin, then the elements below gross margin, that the operating leverage in the gross margin is not very big. Although over a 4- or 5-year period, there will be a structural improvement, simply because of operating leverage. The year-on-year improvement is relatively small because the vast majority of our costs in our operation is variable, because we have an assembly operation and no real manufacturing operation. So don't expect too much from that. But again, if you add it up five years in a row, yes, there is a benefit.
On SG&A and R&D, this year, 2021, especially the R&D cost is actually lower as a percentage of sales than what it should be. We've grown very rapidly in this year. We have not caught up fully with investing in R&D, simply because the growth was so rapid. Two, it is not easy to find the right people. There is a war on talent going on as you all know. We will need to catch up. Compared to this year, R&D will actually go up and will be a negative in our EBIT margin. Compared to 2020, it will be similar or down somewhat. Compared to 2020, there will be an improvement most likely.
Compared to 2020, you will see a benefit in our operating margin. We have SG&A. That's where we expect the most structural benefits from operating leverage. We've guided high single digits. We're now in double-digit numbers. There we will see benefits. If you add that all up, yeah, more or less you stay within this 26%-30% range. Of course, from quarter- to- quarter and from year - to- year, there will be differences in application mix. You've seen it every year, you've seen it every quarter. You've seen the margin in the beginning of this year, which was in excess of 49% in Q1. Now we are at 47.2. Swings of 1, 2, sometimes even 3% is not completely abnormal simply due to application mix differences.
The structural drivers that we see, especially compared to this year, because you guys all look at the margin this year, take into account R&D as a % of sales is expected to increase somewhat but will come down, compared to 2020.
Very clear. Thank you both.
Thank you. Next question comes from the line of Tammy Qiu. Please go ahead.
Hi. Thank you guys for taking my question. Firstly on the Foundry customers and Logic customers. Based on the tool you are shipping to their shops today, will you be able to tell is that used for 4 nanometer or 3 nanometer for your Foundry customer today? And will you be able to know that therefore next year we may see a higher level of insertion because of them moving to 3 nanometer comparing to this year? I have a follow-up as well.
Hi, Tammy. Thanks a lot. I think what we are seeing, first of all, in terms of orders, we are seeing of course orders coming in for the additions, capacity additions on the current node. At the same time, we are seeing also the orders are coming in now for build out of the next node. In that respect, we are seeing both.
You know, as we go on, you know, we will be shipping not only, let's say, current node, let's say, capacity expansion tools, but we will be also shipping tools that will be used for the build up of the next node as they go into a risk or pilot production, you know, I would believe over the next year.
Okay, cool. Just follow up on the DRAM high-k metal gate question. You mentioned that you still need to see what the high-k metal gate penetration for DRAM over the next few years. I'm just wondering from your visibility today, do you see that as a straight line adoption curve going up from here? Or we may see a period of, let's say, you know, a pause from adoption perspective. Because recalling what happened at foundry and logic when they are adopting high-k metal gate, it was a big wave, then it would sort of slow down a little bit before double patterning started to be using ALD. Are we going to see a similar pattern or do you think it's more sort of in a smooth line adoption curve?
The honest answer, Tammy, is we hope it's a big wave. We do see that, you know, there is in fact I would go to the point of saying that, you know, the number of tools that have been ordered and that we actually have shipped and will be shipping exceeded our forecast. In that sense, we think that the adoption is actually higher. Is it going to be a straight line or, you know, a hockey stick? I think that's going to be difficult for us to give any reasonable, let's say, feedback, because it's really very much dependent on our customers and their customers who are the end users.
Okay. Thank you.
Thank you. Next question comes from the line of Timm Schulze-Melander. Please go ahead.
Hi there. Good afternoon. Thank you for taking my question. I had three very quick ones if I may. The first one was on the order guide, which is down sequentially. I just wanted to touch on whether there's something we should be taking away from that. Is that just a supply chain issue? The second question, just to follow up on the previous questions on the gross margin walk. Could you maybe talk about whether you've already seen any impact in the gross margin from cost inflation and kind of what kind of year-on-year trends you're running with into 2022, please. The third question I had was on your service and spares profitability. Does it vary as much by application as the equipment business does?
Can you maybe just give us some color as to how the margins in your service and spares business have sort of trended over the year? Thank you.
Sure, Timm. I think I will, you know, probably answer the first one on the
What you have alluded to as the lower order guidance. Then perhaps Paul could give you again more color on the gross margin and maybe also the spares and service, let's say profitability or gross margin level. I think in terms of orders that we are seeing, we have guided the fourth quarter to be around EUR 600 million. As you know, I've explained in the earlier question to Mark from ING, we you know, one of the reasons why you know, we have only guided to, for example, one number today, is we think that you know, that is going to be a fairly accurate number of let's say the orders that we will get.
You know, again, we think that the demand is healthy. Especially coming in from logic and foundry. As we have also witnessed in the third quarter, the orders coming in for power analog was also very strong. We think that you know, if we look at EUR 600 million order intake compared to you know, maybe what we just delivered 625, there isn't really a lot of substantial difference. Order intake or order demand continues to be at a very high level.
Thank you.
Thanks. Let's first do the gross margin, cost inflation, question. The answer is yes, we have seen impact of the cost inflation, you know, logistics cost on some commodities. At the same time, we've seen more benefit from other materials still. Net-net, we've still seen a positive. If there would have been no cost inflation in, let's say, logistic cost, the commodities, et cetera, the margin would have even been better than it is. Yeah. Also important to understand that the net impact on our cost of goods, take into account all the effort that has been done by our supply teams, supply chain teams, is still a positive. We have seen a small reduction in our cost price.
For next year, it's still a little bit too early to tell. Of course, we have a certain view, but I think it's too early because there's still quite some uncertainty to share that. In any case, as far as we see it now, we do not expect a large impact of cost inflation. That's our current view. Of course, it's still early days, and we will have to see in the coming months, quarters how this will further develop. We do see opportunity still for certain parts in our bill of material. We also clearly see certain yeah, commodities and logistics costs still creeping up. And net-net, the impact should not be that big. Anyway, we'll update you in subsequent calls.
Of course, it's a very different dynamic than with the equipment sales. What I can say is that the margin that we generate is within a small range of the equipment margin. It's not very far away from that. It's sometimes very close, sometimes there's a few percentage points difference, but it trends pretty much in line with the equipment margin.
Okay, thanks. Thanks very much.
Yeah.
Yep, that's great. Thank you.
Thank you. Next question comes from the line of Didier Scemama. Please go ahead.
Good afternoon. Congrats on the quarter guide. Two questions, if I may. I think a question has been sort of tried to be asked earlier. If you look at your equipment revenues this year, you're not going to materially outperform the WFE market, which is sort of unexpected, I would say, given your exposure to probably one of the smartest and fastest growing segments of the market. We can see that in your bookings. My question is the following. Do you expect to materially outperform WFE next year? Number one. Number two, I'm gonna put sort of pressure on you by asking you, if I look at your order intake, is EUR 2.5 billion revenue 2022 a crazy number?
I've got a quick follow-up.
By the way, thanks for the question. I think when you look at, you know, what we think the WFE growth will be this year, you know, as we have just let's say released of a mid- to high 30%. If we then look at our revenue, equipment revenue, and if we look at, you know, what we have guided for the fourth quarter, we actually think that we are there. We probably are at the level of growing at the same or maybe even slightly above the WFE growth of a mid- to higher 30%.
That one, you know, we can say for 2021, but as far as 2022, I think it's still too early days. We will probably have to really look into what is going to be the growth. I think, you know, the, there's all kinds of projections as to what's gonna happen in 2022, but it's still too early. On the EUR 2.5 billion revenue question, I can tell you I would love that. You know, again, something that is really too early for us to give any color or guidance. We will have, as we have always mentioned.
We're gonna exit the year, you know, with a strong backlog. We think that the first half should be healthy for us. Visibility going into, for example, the second half is still very difficult. We are not able to provide any color at this moment as far as 2022 is concerned.
Got it. Then on the gate-all-around build up, you know, I think some of your customers have got, like, a sort of 2-3-year deployment schedule. Can you give us a sense of how much of your revenues in 2021 has been sort of driven by the initial production build at one of your customers for gate-all-around? And how would you expect that to play out over the course of the next 2-3 years? You know, how big can that be for you guys, maybe 2022, 2023?
As I explained earlier, I think, you know, the orders and the revenue that we are seeing at this moment is a mixture of, let's say, capacity additions at the current node, but also, you know, built up for the next nodes. Of course, when you take the two in comparison, high volume capacity additions will be bigger rather than just the built up for the next nodes. I think going forward into the next couple of years, we should see the built up progressing. At the same time, I think the transition to gate-all-around should come at a fairly steady but gradual, let's say, pace.
Okay. Can I just ask a quick follow-up, tiny one, just for Paul, coming back to the question on the sort of margin leverage. I think we all understand the sort of variable cost structure you've got on COGS, and I think you very clearly explained what's going on in R&D and SG&A. I just wondered, you know, in SG&A, appreciate it's where the leverage is coming from, but that's still gonna go up in absolute dollars. And I appreciate you guys are growing like a train, so you need to spend more on SG&A. But is it more on the sales and marketing side, or is it more in G&A simply because you need, you know, more controllers, more legal, more, you know, these sort of people rather?
Because your customer base, you know, your sales and marketing team, your customer base is not growing, right?
No.
It's a finite number of clients, and probably 10 clients, 15 clients at the most. I mean, why would you need to spend on sales and marketing dramatically up from here?
Okay. Thank you. Thanks for the question. This is. You actually have given the answer already yourself. This is indeed to support the growth that we're seeing and have been seeing. Also, I think in SG&A, the company has been running a little bit behind the fact simply because it has grown so rapidly and not always easy to get people. It's a little bit across the board because we have more contracts, there's more legal people. We need to improve processes. Certain processes have worked very well given the size of the company two years ago, but start now to be challenged more and stretched more given the current size and especially given the future size.
We need to invest, do something further in our IT infrastructure, which itself is good, but needs to be further improved to cope with the growth that we see. We have actually more than 10 customers. I do know that we have a few large ones, but we have a few more customers, and also quite a few more contracts to deal with. That's definitely will need more sales and account people as well. It is a little bit across the board. Having said that, obviously over this five-year period, it could be different again from one quarter to the other or from one year to the other. We might step up a little bit more but then slow down in the year thereafter.
That will vary from year to year and maybe even from half year to half year. Over time, of course, we will definitely not grow the SG&A expenses as much as the top line. That is crystal clear.
Yeah. Perfect.
I understand.
All right. Thanks very much. Yeah, all the best. Great quarter really.
Thank you.
Thank you.
Thank you. Next question comes from the line of Adithya Metuku. Please go ahead.
Yeah. Good afternoon, guys. All of my questions have been answered.
Adi, we cannot hear you.
Sorry, we cannot hear you.
Hello. Is that better? Can you hear me?
Yes. Yes.
Oh, apologies. Good afternoon. I, my questions have largely been answered. I just had one question on the medium term. You actually CMD noted that the 3D DRAM transition will happen in the mid-2020s, and one of your peers immediately after you noted that it would be later into the 2020s. I just wondered if you could give us some color on the factors driving confidence in your forecast that the transition to 3D DRAM will indeed happen in mid-2020s and not later. You know, what are the factors driving that confidence? That would be super helpful. Thank you.
Sure, Adi. So if we look at, you know, during our Investor Day, we brought up the topic or let's say the inflection, the potential inflection of 3D DRAM, as a part of new growth opportunities actually for us for the longer term, beyond 25. In the same context, we also spoke about, for example, second generation gate-all-around, you know, the transition, let's say going from nanosheet to a forksheet in Logic and Foundry. When we look at 3D DRAM, it's obviously still early. The timing of adoption will likely differ, depending on the customer. We actually expect the first adoption to be in the 2026 time frame.
You know, the one thing that we wanted to deliver as a key message is that we are already in early engagement with leading DRAM customers and that based on these engagements, we think that 3D DRAM when it comes and when it happens, it's going to be providing us with new opportunities. Maybe just to clarify a little bit, that does not mean that our DRAM opportunities are just going to be dependent on the future inflection of 3D DRAM. As we have also mentioned a couple of times in the past, we have a pipeline of new ALD FE applications that we have already been working on with customers. High-K metal gate was the first one that got adopted by all three leading DRAM manufacturers.
For the applications that we have in the pipeline, we do expect that some of them will be inserted or adopted and inserted during the 2022 to 2023 time frame, thereby helping us to grow our share in the DRAM segment. Maybe just to summarize, I think 3D DRAM is a very interesting long-term opportunity for us. In the short to medium term, we have several new applications in the pipeline for next generation of planar DRAM. We expect this pipeline applications to actually be contributing to our growth in the DRAM business.
Understood. Just as a follow-up to that, I mean, it sounds like some of the smaller guys, because they can't afford EUV, might end up going to 3D DRAM quicker than the bigger guys. In which case, you know, if I look at your slide deck again from the CMD, the cost difference per bit is so big that, you know, it feels like the bigger guys will not be able to continue with EUV shrinking for too long, while the smaller guys are providing bits at a much lower cost using 3D DRAM. Would you agree with that sentiment? Essentially that will force the larger guys to move to 3D DRAM quicker than they would have otherwise done.
I think that's difficult. I think we will need to wait until there is more clarity on the technology before we can make any kind of even speculation. Because I think today the technology is still you know at the discussion stage. We probably will need some time before we for example know what is the specs for 3D DRAM. I think that's still gonna take some time. Today I think it's difficult to make any kind of assessment along what you just said.
Okay, understood. Thank you.
Thank you. Next question comes from the line of David O'Connor. Please go ahead.
Great. Good afternoon. Thanks for taking my question. Two from my side, if I may. Maybe firstly, Benjamin, you know, you mentioned the Q4 order intake of EUR 600 million. That includes some benefit from supply constraints as customers, you mentioned, are placing orders earlier. Just trying to quantify that. I mean, is that a 10% impact on orders or is it more than that? Just trying to get a baseline of the true kind of order run rate as we exit 2021. I can follow up.
Thanks. Thanks, David. I will be very up front and honest. Actually, I do not know the answer. By and large, when we talk about early ordering, I think, you know, it's, of course, we do see some of that, and some of our customers are ordering a little bit earlier in response to the supply chain constraints affecting the whole industry. Is it like a very significant amount or is it like they are ordering months, you know, earlier? The answer is no. I would say that there is some impact, but it's not that big.
Understood. That's helpful. Maybe a longer-term question. You know, when you looked at the future logic and foundry roadmaps, and you know, in particular, you start to see more of the success of ALD and ALE steps happening under vacuum. Can you talk a bit about ASM's positioning, you know, to capture those steps versus the kind of larger etch peers out there who are also competing in the ALD market? You know, what portion of ALD steps do these kind of vacuum steps represent? Any kind of color around that or how you're thinking about that would be helpful. Thank you.
Sure, David. I think one of the things that you'll find with the increasing complexity as we get down to smaller nodes is that on some applications the surface cleanliness is very critical. Before you can use ALD to deposit whatever materials that you would like to deposit, first of all, you have to make sure that the surface is very clean. The reason for that is in some areas, in some cases, the thickness of the ALD layers is what we call just two or three monolayers, two or three levels of atoms. That's why the cleanliness is absolutely critical.
Now, we have, as we have shared, during our Investor Day, developed what we call, surface cleaning technologies, and equipment, that enables us to, do that, to make sure that, before we do the deposition, we are able to make the, surface very clean. It's a form of, you know, what the broader industry likes to call ALE. But we have already developed those technical capabilities. And we have actually been already delivering them to our customers. In that respect, we are very, I would say, comfortable with our capabilities. But just to maybe be clear, you know, the cleaning technologies that we have made is in support of our ALD and epitaxy business.
You know, we have no intention at this moment to, for example, go into an adjacent etcher kind of technology. That's not our, let's say, intention. It is mainly whatever we do in terms of surface cleaning is just to support our deposition, let's say products.
That's helpful. Thank you very much.
Thank you. That was the last question. With this, I would like to hand back over to the CEO, Mr. Benjamin Loh for final remarks.
Thank you. I would like to thank you all for your attendance today, also on behalf of Paul and Victor. We look forward to meeting many of you soon again, either in person or virtually in one of the broker conferences or other investor events in which we will be participating. Thank you again. Stay safe and goodbye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.