Good afternoon. This is the Chorus Call Conference operator. Welcome, thank you for joining the ASM International Second Quarter 2023 Earnings Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Victor Bareño, Investor Relatons. Please go ahead, sir.
Thank you, Judith. Welcome everyone to our Q2 earnings call. I'm joined here today by our CEO, Benjamin Loh, and our CFO, Paul Verhagen. ASM issued its second quarter 2023 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, asm.com, 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 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 now hand the call over to Benjamin Loh, CEO of ASM.
Thank you, Victor. Thanks to everyone for attending our second quarter 2023 conference call. Before we begin, just want to remind everyone that we'll be hosting our Investor Day on September 26th in London, and we hope you can join us either in person or virtually. For today's call, Paul will, as usual, first review our second quarter financial results. I will continue with a discussion of the market trends and the outlook, followed by Q&A. Over to you, Paul.
Thank you, Benjamin, welcome everyone. Just for info, that I will focus in my remarks on normalized results, so the details of the acquisition-related PPA expenses can be found in the press release and in the investor presentation. Let's now review the results. In the second quarter of 2023, revenue came in at EUR 669 million, up 21% year-on-year at constant currencies, and down 5% quarter-on-quarter. Revenue was in line with our guidance of EUR 650 million-EUR 690 million, equipment revenue increased 22% year-on-year at constant currencies, whereby growth was mainly driven by non-ALD sales. Overall, ALD sales continued to constitute more than half of the equipment sales. Spares and service revenue had, again, a solid performance with 15% year-on-year growth at constant currencies.
In terms of customer segments, revenue is led by foundry, with revenue in this segment down quarter-on-quarter and up year-on-year. Combined logic foundry sales continued to represent the larger part of our sales and were slightly down versus Q1, and fairly stable year-on-year. Power analog was the second largest segment and increased both sequentially and year-on-year. Momentum in this market continues to be very strong for our company. Sales of the combined power, analog, and wafer manufacturing business, including the consolidation of LPE, more than doubled in the first 6 months of the year from a smaller base last year, and significantly surpassed the size of our currently soft memory business. Memory sales in Q2 increased somewhat compared to Q1 and were driven by DRAM. However, compared to the run rate of last year, sales in Q2 were down substantially.
Gross margin decreased compared to the exceptional high level of 51.1% in Q1, was still very solid at 49.0% in Q2, supported by mix and including a high contribution from China. SG&A expenses increased by 10% at constant currencies compared to Q2 last year, and by 7% compared to the previous quarter, mainly reflecting annual merit increases in April. Compared to the quarterly increases that we've seen last year, the pace of SG&A growth has moderated, as most of the investments needed to strengthen the organization were completed in 2022, and also reflecting increased cost control. For the full year 2023, we still expect SG&A to be similar or somewhat lower compared to the Q4 2022 run rate.
Net R&D expenses were up 50% year-on-year at constant currencies, driven by an increase in the number of R&D projects. For the full year 2023, we expect net R&D to be slightly higher than the run rate in Q4 last year. Operating results increased 23% year-on-year at constant currencies, with operating margin at 26.9%, up from 26.5% in the same quarter last year. As already communicated in the last couple of quarters, we expect the full year 2023 operating margin to be at 26% or slightly lower, as a result of the lower revenue level expected in the second half of the year.
Below the operating line, financial results include the currency translation gain of EUR 8 million. This compares to a translation gain of EUR 26 million in the second quarter of last year, the translation loss of EUR 7 million in Q1 of this year. This is explained by the fact that we hold the largest part of our cash in U.S. dollar. The translation differences are included in our financial results. Let's move quickly to ASMPT. Our share in the income from ASMPT, income from investments, reflecting approximately 25% share of net earnings from ASMPT, amounted to EUR 9 million in the second quarter, in line with the first quarter, down from EUR 27 million in the second quarter of last year, due to the downturn in the back-end equipment market. Back to ASM.
Order intake in the second quarter was EUR 486 million, down 48% year-on-year at constant currencies, down 24% compared to the first quarter. The lower Q2 order intake reflects generally weaker market conditions, as well as pushouts in leading edge logic foundry, that we already expected and communicated with our Q1 orders. In addition, the drop in orders was also explained by some further normalization of the backlog compared to the elevated level in earlier quarters. Looking at the breakdown in bookings by customer segments, front foundry was the largest segment, followed by logic, memory, and then Power Analog. Combined logic foundry orders were down quarter-on-quarter and strongly down compared to the record high level in Q2 last year.
Memory orders in Q2 increased somewhat compared to Q1, with DRAM accounting for the largest part, but were still substantially down year-on-year. Let's look at the balance sheet. Our financial position continues to be solid. We ended the quarter with EUR 490 million in cash, down from EUR 573 million at the end of the first quarter. In the second quarter, we generated a free cash flow of EUR 86 million, down from EUR 121 million in the same quarter last year. Cash from operations increased year-on-year, but this was offset by higher cash used for CapEx and product development. CapEx increased to EUR 44 million.
For the full year, we still target EUR 150 million-EUR 200 million in CapEx, with the bulk of the investments relating to expanding and upgrading our R&D infrastructure, including the first part of the recently announced expansion in Korea. In Q2, we used EUR 123 million in cash for payment of the dividend of EUR 2.50 per share. In addition, we used EUR 50 million for share buyback. As a reminder, with our Q1 results, we announced a share buyback program of EUR 100 million, which started on April 27, and as the end of last week, we completed 56% of this program. With that, I hand the call back over to Benjamin.
Thank you, Paul. As Paul just discussed, our results in the second quarter were again solid, despite softening market conditions. Most of the semiconductor market segments continued to be slow in the second quarter. Economic uncertainty, inflation, and monetary tightening continued to weigh on end market demand. Key market segments such as smartphones and PCs, saw further negative impact from ongoing inventory corrections. Automotive remained a bright spot with continued solid demand. Artificial intelligence showed a strong acceleration during the quarter, spurred by the fast adoption of new generative AI applications, but related chip volumes are still relatively low. In terms of customer segments, logic foundry revenue had, again, a solid contribution in the second quarter and accounted for the largest part of our revenue. This was supported by the solid backlog at the end of first quarter, and with further capacity additions in advanced nodes.
In terms of demand, the trend weakened during the quarter, and order intake in the second quarter reflected the impact of softer market conditions and pushouts, as we already flagged with our first quarter results. Continued inventory corrections and weaker than expected, end demand, led some customers to reconsider their spending plans for this year. In addition, part of the pushouts is also explained by some delays in new fab readiness. Despite the weakness in the shorter term, logic foundry remains an important and attractive growth driver for ASM. Our leading customers continue to execute on their technology roadmaps and reconfirm their timelines with regards to the upcoming Gate-All-Around node. We are confident that the transition to Gate-All-Around nanosheet technology will result in a meaningful double-digit increase in our serve available market, as ALD will be required for a growing number of critical deposition steps.
With customers' process development nearing completion, we believe we are in a good position to maintain our leading edge in logic foundry ALD. In addition, we still expect to increase our share of the epi market in the transition to Gate-All-Around. Gate-All-Around nanosheet technology will be key for faster and more power-efficient semiconductor devices, which in turn will be required for next-generation applications, such as in high-performance computing. We still expect the first meaningful Gate-All-Around orders in the 4th quarter of this year for pilot line activities planned for 2024. The introduction of Gate-All-Around in high-volume manufacturing by the leading customers are still expected to be in 2025. In the memory sector, market conditions continued to be tough in the second quarter, as memory prices remain under pressure and manufacturers further reduce volumes to address excess inventory levels.
CapEx is currently limited to some modest technology investments. While we benefited from such investments, particularly with high-k metal gate for high-performance DRAM, the related volumes are relatively small. Our overall memory sales were substantially below last year's sales, and that is also what we expect for the second half. Nevertheless, we believe that we are well-positioned for increased sales once the memory market recovers. We have strengthened our positions with high-k metal gate in DRAM, as mentioned, and with ALD gap-fill in 3D NAND. We continue to work on additional new applications with the potential for further share of wallet gains in memory in the coming years. The trend in the analog, power analog sector remains overall solid. Demand in consumer-related applications further weakened in the second quarter, but this was again offset by continued robust demand in the automotive sector.
We mainly play in these markets with our vertical furnaces and part of our EPI portfolio. On top of market demand, momentum remains solid for the new products that we introduced in recent years, such as Intrepid ESA and our new 300 millimeter SONORA vertical furnace. As Paul mentioned, combined sales in the power analog and wafer segments more than doubled in the first half, and we expect a continued strong performance in the second half. Let's now move to China. Let me now provide you with an update on our business in the Chinese market. A meaningful part of our power analog and wafer business is generated in China, and this was again a very strong market in the second quarter.
In China, we have also been successful in winning several new customers in power analog in the last few years, which is now translating into significant revenue increases. Apart from power analog, we also serve China in the relatively advanced markets. In October last year, as you all know, the U.S. government issued export controls, basically targeted at the 14 nanometer and below technology nodes. We previously communicated that these export controls would have a 15%-25% negative impact on our China sales. Recently, the Dutch and the Japanese government also issued new export control measures. In terms of financial impact, we don't expect a meaningful additional effect from this Dutch and Japanese measures compared to the 15%-25% impact already previously announced.
Following the export controls, a number of customers in China have redirected their strategy towards the less advanced nodes and resume again the related investments. Investments picked up in technology nodes such as 22 nanometer and 28 nanometer, and these investments also contributed to our higher sales in China in the second quarter. It is important to note that there are also substantial parts of the market in China, such as in the 40 nanometer and 65 nanometer markets, where investments have increased in a meaningful way, but to these nodes, our company has very limited exposure. On the silicon carbide business. Since the acquisition of LPE, this activity has developed in a very positive way. Demand continues to be strong. Our teams remains focused on ramping manufacturing despite supply chain constraints, which are still more challenging in this high-growth part of the market.
With a further increase expected in the second half, we are confident that our silicon carbide sales will increase to more than EUR 130 million as earlier communicated. We believe the film quality and cost of ownership offered by our silicon carbide EPI tools are among the best, if not the best, in the industry. The transition from 150 millimeters to 200 millimeter wafer size offers opportunities to step up our market share. Our R&D engagements with potential new customers have substantially increased since we announced the acquisition of LPE, and as we mentioned in the press release, after securing a leading North American customer earlier this year, we have now also received the first orders from a major European customer. Before moving to the outlook, I'd like to highlight the groundbreaking event that we had a couple of months ago in Dongtan, Korea.
We plan to invest EUR 100 million in an expanded innovation and manufacturing center. The new facility will more than double our R&D clean room space in Dongtan and is expected to be completed by 2025. Apart from serving our key customers in the Korean market, we also have our global center for plasma ALD applications in Korea. Here, we have developed many leading ALD applications, such as our TENZA Gapfill solutions, which will see increased usage in both memory and logic foundry in the coming years. As part of the expansion, we've also increased manufacturing capacity in Korea. Turning to the outlook for the rest of the year. We expect sales of between EUR 580 million-EUR 620 million in the third quarter at constant currencies.
With the first quarter results, we announced that pushouts and weaker demand in logic foundry would result in lower orders in both the second quarter and the third quarter compared to the level in the first quarter. This is also what we still expect for the third quarter, although we now project the drop in the third quarter orders to be less pronounced than in the second quarter. For the second half, our view is unchanged. We still expect revenue to be down 10% or more compared to the first half....This reflects the balance of continued weakness in memory, softening in logic foundry, and a continuous solid trend in power analog. For 2023 as a whole, we still expect our revenue to increase by a single-digit percentage, including LPE and at constant currencies.
This compares to the WFE wafer fab equipment market, which is now expected to drop by a mid-to-high teens % in 2023. The WFE forecast is slightly more positive than 3 months ago, and for the largest part, explained by stronger mature node spending in China. We still expect to outperform WFE this year. This concludes our prepared remarks. Let's now move to Q&A.
We'd like to ask you to please limit your questions to not more than 2 at a time, so that everyone has a chance to ask a question. Okay, Judith, we are ready for the first question, please.
Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press Star and One on their touchtone telephone. To remove yourself from the question queue, please press Star and Two. Please pick up the receiver when asking questions. Anyone who has a question may press Star and One at this time. The first question is from Didier Scemama, with Bank of America. Please go ahead.
Thanks very much. Good afternoon. Couple of questions. First of all, Benjamin, if you could give us a bit more color on the Q3 bookings, what's driving the bounce versus Q2? Is it initial Gate-All-Around orders? Is it leading-edge logic foundry, or is it still driven by the mature nodes, and particularly in China? Then I'll have a follow-up after that. Thank you.
Didier, thank you very much. I think, you know, we are confident that, you know, the third quarter bookings, you know, of course, compared to the second quarter, will be higher. I think we are also seeing that this is not just main, due to one main factor, or one specific market segment. I think, you know, it's generally, a combination of, all of them. I think, you know, with reference to your specific question on Gate-All-Around orders, we do expect them in the following quarter, which is in the fourth quarter.
Got it. With regards to Q4, I mean, are you in a position to now indicate that Q4 bookings will increase versus Q3, or is it too early to say?
I think, the best thing, Didier, for us to, you know, kind of guide or give some color is, you know, if you look at both the Q3 and Q4, as compared to Q2, it will be higher, but we are not going to, at this stage, comment on the difference between Q3 and Q4. Of course, again, just to highlight that, in Q4, we do expect, to receive, the, first meaningful orders, you know, for Gate-All-Around pilot production.
Got it. Maybe one final question, if I may. one of your largest, if not your largest customer, I think, made some comments on the last earnings call that, effectively, their CapEx growth in the coming years would trail off versus maybe the last couple of years, which perhaps is not a huge surprise since they've been spending so much in 2021, and in 2022. I wondered whether do you think that these comments are consistent with the guidance you've given at your last Capital Markets Day, and whether it makes, it changes your view, if you want, of the adoption of ALD and Gate-All-Around, for ASM, specifically? Thank you.
I think, of course, Didier, you know, they are speaking with reference to, probably, you know, next year onwards. I think, you know, in our opinion, you know, 2024 is still early to, you know, make any, let's say, or give any color. But we do understand that they are still investing according to their technology roadmaps, and we haven't heard anything otherwise from them, to the contrary. We continue to be, I would say, relatively, you know, positive about their plans going forward.
Thank you.
Thank you, Didier. Can we go to the next caller, please?
The next question is from François Bouvignies, with UBS. Please go ahead.
Hi, thank you. I just wanted to clarify your get more focus on the orders again from Didier, especially on Q4, you mentioned that you will have the first orders of Gate-All-Around. You also said that you think your customers will adopt mass production in 2025. Between Q4 2023 and 2025 mass production, is it fair to assume that the orders will be significantly higher, through, you know, from Q4 onwards? You know, I just wondering about the phasing of these orders, especially when you talk about the double-digit increase in served available markets from Gate-All-Around, it would suggest a significant increase in orders from Q4 this year. Is that the right way to look at it, or is there any specific phasing we should think about?
Francois, thanks for the question. I think it will very much depend, you know, on each individual customer and, you know, especially, you know, for each one of them, what is the demand? Because that is going to, you know, determine how fast they want to ramp. Of course, you know, the other question, of course, is how fast they can complete their pilot manufacturing. I think at this stage, it's a little bit premature for us to give you any kind of phasing or timelines.
You know, just to maybe highlight that all three of the major players who are going to move into the Gate-All-Around node, all have confirmed or reconfirmed that they are going to go into pilot manufacturing 2024, high volume manufacturing, 2025.
Great. Thank you. Good to hear. Maybe on the memory side, you mentioned that you don't expect any recovery through the rest of the year. Is it, this comment, is it true for orders as well? Because the way I understand it is like you won't see any impact on the revenues. If we assume the memory market stabilize and recover for next year, you should get the orders ahead of it. That's what I was wondering, if your comment is true for orders as well as no recovery.
Sure. I think, you know, what we have, you know, just going through in the prepared remarks, of course, is that, you know, we don't see a memory, at least for us, you know, recovering. Except for, you know, technology type of investments, which is a, you know, relatively small compared to when they add capacity. I think what we are seeing in the memory market is, you know, consensus is that you are going to see memory chip sales starting to recover, not rapidly, but starting to recover, and that perhaps Q2, maybe even early Q3, is the trough, and it will recover.
You know, let's not forget that the memory chip manufacturers still have a lot of capacity today, that they can just turn on, and they can ramp up and add significant capacity. We do believe that except, again, for technology type of investment or trying to, you know, upgrade, you know, for example, commodity DRAM to a high performance DRAM, we do not expect to see a lot of capacity additions, you know, for some time.
Got it. Thank you very much.
Thank you, Francois.
The next question, is from Stephane Houri, with ODDO BHF. Please go ahead.
Yes, good afternoon. Thank you very much for taking the questions. I've actually, I've got two. The first one is on silicon carbide. Could you talk about the customer concentration and the size of the order book that you have in silicon carbide, since you have announced second big customer and notably, one in Europe? The second question is about the gross margin, because you keep on surprising positively on the gross margin. You explained that it's because of the mix and notably about China, is there a chance that it continues through the year? Thank you.
Stephane, thank you very much. I'm gonna answer the question on silicon carbide. Paul will give you more color on the gross margin. Yes, I think we are seeing very good traction in the silicon carbide epitaxy business after the acquisition of LPE. This is a market, of course, that is, you know, being propelled, you know, with significant growth, primarily driven by, you know, electric vehicles. In terms of customer concentration, I think we are seeing very encouraging developments after we took over the company. We have practically engagements with almost every silicon carbide manufacturer, you know, in the world.
been really encouraging is our ability because they are now part of a larger company with a larger footprint that we have been able to convince and penetrate certain customers that in the past was very concerned about the capability of LPE. We mentioned a couple of months ago about the first North American customer win. Right now we have won a major European customer. Both the North American and the European customers are, I would say, you know, amongst the major leading players in the silicon carbide business. We do expect that over time, you know, that business is going to grow. In terms of the order book, I think we will probably not comment at this moment in time.
Suffice to say that we are happy with the progress that we are making, and we are in a lot of discussions with various customers all over the world.
Then on the margin, indeed, we had again a strong margin in Q2, 49%. That was good to see. Of course, as you know, the explanation is always related to mix, and mix also includes various elements. One important element here is again a relatively high contribution from China, where you know that we make above average margins. We disclosed that earlier, so that was definitely one element. The other was also that the rest of the mix was actually pretty strong. Going forward, I mean, I've said that, yeah, also in previous calls, sometimes you have the highest margin in Q1 and 2 quarters low, and then again, high in Q4, or the other way around.
Sometimes you have 2 sequential quarters with high margins. I don't expect this to continue. We target to stay within the 46%-50%. The mix is stronger than what you would expect for a full year mix. Also for the subsequent quarters, I would not expect to see this level, to be very honest. That's what I can tell you. More than that, it is difficult to say at this stage, but we have seen just 2 quarters with, again, a relatively high contribution from China and also a strong.
Okay, thank you.
Thank you, Stephane.
The next question is from Tammy Qiu with Berenberg. Please go ahead.
Hi. Thank you, guys. Firstly, on China, obviously, your demand has been really strong in China. May I ask if your Chinese demand is actually stronger than what you expected back in Q1, or that has always been as strong as previously expected? Also, how should I be thinking about China in Q3 and Q4 and also 2024, please?
Thank you, Tammy. I think, you know, we were actually, you know, compared to the first quarter, I think the second quarter, you know, came in, you know, very much to what we kind of expected, so I don't think that there was any surprise. Now, going forward into the second half, I think there is more uncertainty there. I think there are still a lot of Chinese customers that are also considering, you know, how they are going to invest, what they are going to invest into, and also because, you know, of the market, let's say, softening. You know, there are certain decisions that are being debated now with the Chinese customers. I think it's still left to be seen.
The first half was, I would say, you know, a strong, let's say, performance, for us, you know, coming in from China.
Okay. Thank you, Benjamin. Also relating to your 2 nanometer. You mentioned that in Q4, you will start to have the first batch of pilot line order. Is that going to be coming from all 3 of them at the same time, or some of them will actually come earlier than later?
Sorry, are you referring to, Gate-All-Around?
Yes, Gate-All-Around, 2 nanometer-
Okay.
In Q4, please.
you know, without going again into, you know, customer details, I think we do expect that, you know, out of the three customers, we are going to get meaningful, you know, first orders for Gate-All-Around pilot production. I think, you know, at least two of them have already confirmed that they will be moving into a pilot manufacturing 2024. I think maybe from there you can make a guess. you know, the all three of them are on track, at least at this moment, from what we have been told, and based on their plans, they will also move into high volume manufacturing in 2025.
Okay, thank you.
Thank you, Tammy.
The next question is from Alexander Duval with Goldman Sachs. Please go ahead.
Hi, there. Thank you very much for the question. Just wanted to follow up on the question about China. Obviously, you stated today you don't see any impact from the latest restrictions, one of your peers stated it does also not see any further impact from any new restrictions that could come in from the U.S. I just wondered how you see things evolving there. Just to follow up on the point about fab readiness, obviously, you referenced the push outs in logic that affected order intake. How do you think about whether that could create any risk of other push outs from 2024 into 2025? Just want to understand that. Thank you.
Hi, Alex. Sure. Maybe just to clarify, of course, you know, we follow all the export control regulations, you know, 100%. You know, we will only sell and deliver equipment to, you know, China, fully complying to all the export control regulations, and that includes the latest regulations that have been announced by the Dutch and the Japanese governments. You know, that's something that I would like to emphasize first. Now, based on that, you know, there are still certain equipment that we are still able to, you know, ship and sell to China.
You know, when we do not see additional impact, we are referring to the latest Dutch and Japanese regulations and comparing them to what was announced by the U.S. government in October 7th last year. Of course, there is speculation that the U.S. government may announce new regulations coming. We are not gonna speculate on that. We will be compliant. We will follow all applications or all regulations when they are announced. Sorry, fab readiness. Yes, we are seeing fab readiness issues, and I think this has also been in the papers or announced by some of our customers. Some of the, let's say, orders that, you know, are being pushed out because of fab readiness, some of them will drop into 2024.
We still need to, you know, see when the timing will be. You know, I would say that some of them, you know, could still end up in 2023, maybe at the end, but some of them could drop into 2024.
Helpful. Thank you.
The next question is from Sandeep Deshpande with J.P. Morgan. Please go ahead.
Yeah, hi. Thanks for letting me on. Ben, maybe a question from me. I mean, in to a response to earlier questions, you said that you have not seen a significant change in the second quarter. Are you saying at this point that this improvement you're indicating in the orders in the third quarter as well as, you know, the orders you saw on the ... That nothing really changed in the second quarter, after you had, changed your guidance in the first quarter? I have a second follow-up question on 2024. Thank you.
Sandip, thanks. I think, you know, you're correct. We did not see, you know, major changes. Probably what we did see, if there was a change, was, maybe a little bit, you know, a further softening of the logic, foundry market. That, of course, has also been informed and announced. I think that was the major change that we see. Again, coming back to our first quarter earnings, we kind of, you know, guided, to some extent, you know, that that was probably what was going to happen. In terms of additional impact to us, you know, there is really no major change in our outlook.
Understood. Based on what you see in the market today, do you have any view into 2024? Do you see I mean, clearly you've got the Gate-All-Around related shipments, which are going to help your orders and shipments into 2024. How do you see the overall market? I mean, you've been giving your commentary on WFE into 2024. Do you have an initial view on WFE into 2024, for instance, and of course, how ASM's order book looks at this point into 2024, or if at all, the order book is predictable into 2024 at this point?
First of all, I think in 2024, you know, we think it's still a little bit too early, especially in the context of today's market, where there are, you know, relatively higher levels of uncertainty. I think, you know, a couple of things that perhaps we would like to maybe highlight as far as 2024 is concerned for us. One is that we, you know, we know for sure that is going to be the year of pilot manufacturing for Gate-All-Around, which, you know, has been confirmed by all the three manufacturers. You know, the recovery for memory leading to, you know, more investment, I think that is more uncertain.
However, we continue working with, you know, all the memory manufacturers, in terms of the next node, in terms of the next technology, and whenever that comes back for us, you know, I think we will be in a good position. The next thing, of course, is if you look at the older technology, the power analog wafer, I think, you know, that will continue to be resilient. Last but not least, we are of the firm belief that the silicon carbide epitaxy market in 2024 will continue to grow. In fact, will be, will still be strong.
Understood. Thank you so much.
Thank you, Sandeep.
The next question is from Janardan Menon with Jefferies. Please go ahead.
Yeah, hi. Thanks for taking my question. Just on again, on the 2024, given that your customers are still on track for a commercial volume production of 2 nanometer in 2025, would you expect to deliver any of the commercial orders, not the pilot orders, to them in 2024 itself? Would that be mainly in 2025, say, first half or something like that? What I'm trying to get at is, you know, in the foundry logic segment, which is the bigger driver of your 2024 revenue? Is it the 3 nanometer node adoption, or is it the start of the 2 nanometer Gate-All-Around adoption? I have a brief follow-up, please.
Sure. Janardan, I think, you know, the answer is, it depends, you know, very much on the speed, you know, of each customer. You know, they are be starting pilot manufacturing in 2024. How fast they work out all the box and improve the yield, I think that's still left to be seen. I think the other factor that would determine how fast they move into high volume manufacturing, and if you work backwards, how fast they order equipment and how fast they want us to deliver, will of course, be demand. It depends on their customers, how fast they are pulling in or adopting a 2 nanometer.
I think that's what is going to determine how fast, you know, this Gate-All-Around transition is going to happen.
Is the 3 nanometer demand a factor in your 2024 outlook? Is that a big factor?
I think, you know, what we are looking at, you know, is if you look at, you know, primarily. Let's put aside the 2 nanometer Gate-All-Around. Before that, it's all FinFET. I think we will still see, you know, demand for leading-edge FinFET nodes. Some of them, of course, as I just mentioned earlier, could be a spillover due to a fab readiness delays from 2023. I think going into 2024, again, you know, the leading-edge FinFET nodes is going to be determined by demand. Demand from our customers.
Understood. Just a brief follow-up, your major customer also announced that they're going to introduce a backside power rail version of 2 nanometer in 2026. I was just wondering, is that a technology which will have a further step up from the initial Gate-All-Around version in 2025 in terms of ALD and epitaxy? And is that something that you're already engaged with?
Yeah. We are already engaged with, I would say all of them. You know, the adoption of, you know, backside power rail or backside power distribution do require more ALD layers.
Yeah. Would you describe it as a significant jump, or is it a sort of a steady increase?
That one, I don't think we would comment, because it's quite specific to each different customer, but it does require, you know, more ALD layers to be adopted.
Understood. Thank you very much.
Thank you, Janardhan.
The next question is from Timm Schulze-Melander with Redburn. Please go ahead.
Great. Thank you for taking my questions. I had two, please. The first is Benjamin, just on normalizing lead time. Just looking at ALD for Gate-All-Around, could you just give us an update of where we are in terms of the lead time between order and shipment, and between installation and qualification? Looking at your China business, does any of that order backlog extend into 2024? I had a follow-up. Thank you.
Sure, Timm. I think, you know, lead time is something that we are still working through. We have not fully come back to where we would like. I think today, you know, on the average, we are probably looking at 6 months. You know, we would probably like to improve this a little bit more to get back to, you know, more, you know, what was pre-COVID or pre, you know, supply chain constraint, type of levels. That's something that we are working on. Now, even for, you know, the different products, you know, some of them are longer, some of them are shorter. What we are basically saying is an average lead time of 6 months, you know, that's just to give you an average number.
When you talk about install and installation and so on, this varies very much, you know, depending on the customer and also depending on the application. You know, some applications require a pretty long installation time. It's not just the installation, it's the process tuning, the process, you know, qualification, that can take quite some time. It really, you know, varies, you know, to a large degree. Very difficult to give you know, for example, a firm number or some kind of idea for that. Sorry, Tim, your second question was on China?
Actually, the China bit was the second part of the first question, just asking if there's a part of the order book that extends into 2024 for China yet?
Well, you know, basically, when you look at our backlog, you know, we have the way that we count what is in our backlog and what we announce as our backlog, is whatever that needs to be developed over the next 12 months. Of course, in that backlog, there are some that are actually for 2024.
Great. Thank you. One quick follow-up for Paul, please. Just as we think about Gate-All-Around shipments initially in 2024, would those be dilutive to gross margin in the first instance? Thank you.
I think, Paul, thanks for the question. Yeah, again, it's hard to tell. It's the Gate-All-Around will be part of the total mix. It's depending, again, on application, on customer, like, typically with new products, we've said that before. Some, actually, we will see improvement in the margin happening in subsequent quarters because we need to reach certain yield targets. Others will be immediately where they need to be. It's really hard to say if it's dilutive of nondilutive. It will be at least supportive of where we are now in terms of 46%-50%. That's how we have positioned all this. That's, yeah, that's, I think, where more than that, it's difficult to say.
Yeah, again, it's quite different from customer to customer use application. I cannot give you a very clear answer on that, on that one.
Got it. Thank you.
Thank you, Tim.
The next question is from Robert Sanders with Deutsche Bank. Please go ahead.
Hi, good afternoon. I had a question on the analog power strength that you've seen in recent quarters. I was just wondering if you could just talk about how sustainable you think that is, given, on the one hand, China is spending big, on the other hand, you know, the kind of Western companies seem to be slowing down their CapEx spend. I have a follow-up. Thanks.
Sure. I think, Rob, you are correct. You know, there's quite some spending on power analog, you know, in China, and that's actually helping us also to drive, you know, the revenues in that specific segment, I would say, much stronger than in the past. I think, you know, outside of China, it's more a mixed bag. I think we still see that, you know, there are some, for example, Western players that are still continuing to invest, well, some that are taking a more cautious approach. I think it's very much dependent on which part of the market that they are strong in. I mean, those that are strong in the consumer area, I think there is, you know, more caution.
Those that are strong in the automotive and industrial, I think they are still fairly bullish about the investment, you know, because they are trying to build capacity, planning for the next couple of years ahead.
Just a clarification on the CMD. I'm assuming because it's a two years later CMD, then you'll give an outlook that's two years beyond, so 2027. Is that the way we should think about it when you think about the long-range plan you'll outline? Thanks.
Yes. You know, we haven't really nailed this down, but, you know, most likely that is going to be the case.
Thanks a lot.
Thank you, Rob.
The next question is from Gianmarco Bonacina with Equita. Please go ahead.
Yes, good afternoon. A couple of questions for me on pricing. If you can give more color about on the difference in ASP on the new tools you are going to sell for GA from Q4 versus the current one on the similar, let's say, highest node. On your silicon carbide business, if you can give us an idea here of what's the ASP of the tools. Basically, on the EUR 130 million in sales, how many tools you are going to sell roughly? Thank you.
Yeah, let me take the first part, and then Benjamin, please add if you want to add. On pricing, I'm not gonna give you specific information, but let's say our ALD tools are typically on the higher end of our pricing range compared to some of the other tools. Depending, of course, on the weight of ALD and Gate-All-Around, if you wish, because I think that was specifically your question. It could have some positive impact on the average sales price, but again, it depends on the weight, and it depends also on the rest of the mix. ALD is typically on the higher end of the range. silicon carbide is the opposite.
It's typically on the somewhat lower end of that, of that range. That would have a, yeah, a dilutive effect, if you want, on the average sales price. Yeah, it's hard to tell, Gianmarco, to see what this will finally result in, but these are the two dynamics that we have.
Okay. Just a quick follow-up, but the new tools you're going to ship in pilot compared to the current high-end ALD, they are, let's say, a significantly higher in terms of pricing, or is just slightly higher?
Again, Gianmarco, there is a wide range because, you know, they are new tools. As Paul previously explained, some of these new tools, sometimes, you know, it takes time before we realize, you know, a higher ASP, because, you know, we have to work together with the customers. At the same time, when you see the node, the move from one node to the other node, there's also a lot of tools that have already been in the previous node that, you know, is, you know, which is easier for us in that sense.
I think, you know, when you look at it's very hard to say that, okay, just because we are moving now into a new technology, 2-nanometer Gate-All-Around, will we be seeing tool prices which are going to be higher than before? I think there's also the dynamics, you know, of course, to make sure that, you know, we, in the end, provide the best cost of ownership for the customers, because that's really what counts rather than the ASPs.
Clear. Thank you.
Thanks for your question, Gianmarco.
The next question is from Maarten Verbeek with the IDEA. Please go ahead.
Good morning. It's good afternoon, Maarten of the IDEA Firstly, when I look at your cash flow statement, I see a very strong sequential increase in the capital development expenditure. Could you put some more light on that item?
Of course. You're totally right. You see an increase in development expense, but also an increase in capitalization, of course. The bulk is in product development, and that is simply because of the opportunities that we have, that we see. There's a lot going on. There's an enormous amount of opportunities that we are working on. You've seen also in terms of gross R&D costs, we were at a run rate level of around EUR 90 million. In Q2, we were at EUR 100 million, EUR 10 million higher. Net R&D, by heart, was around EUR 2 million higher, I think, quarter to quarter.
That's simply driven by the number of opportunities that we work on, and in particular, also the, what we call, out-of-pocket costs. Precursors, wafers, materials, services that we buy, to support these developments. That's driving it, and that is all it needs to be, yeah, to be capitalized as it's part of the development cost and not research. It was mainly in development, not so much in the research.
What is the expectation for the year?
The expectation for the year is what I actually earlier mentioned in the prepared remarks. On net R&D, we expect, so post-capitalization, we expect to be somewhat higher based on the Q4 run rate of 2022, which was EUR 75 million. We will be north of EUR 300 million most likely on a net base. On a growth base, we might be somewhat higher there, given, again, the reasons that I just mentioned, the number of opportunities that we're now working on. The net R&D that you see in the P&L will be somewhat higher than Q4 2022 run rate.
Thanks. I'm a bit surprised by the fact that this quarter, you booked a positive foreign currency gain. Whilst when I look at the dollar at a quarter end Q1 and a quarter end Q2, I should have expected a negative, a loss.
I have to trust that what we did is correct. I have not really double-checked that. I have to assume that the dollar actually strengthened compared to the end of Q1. Otherwise, it's pretty hard indeed to book a positive currency result. I will double-check it, but that's the only thing I can say. It was a positive, I believe, of $7 million or so. We had a negative in Q1. I can hardly believe that other currencies would compensate or outweigh the dollar movement. The dollar is typically the determining factor here. I will make sure that I will double-check this.
Okay.
We will follow up with you after the call.
Yeah.
Yeah.
Will do. Thanks.
Yeah. Thank you, Maarten.
The next question is from Marc Hesselink with ING. Please go ahead.
Yes, thank you. First question, actually, a clarification. All the comments that you made on the order intake being stronger in the second half of the year versus the second quarter. If I'm correct, that doesn't include any cyclical recovery from the leading-edge logic foundry segment, and it's purely the technological transition driving that, right?
Marc, I think, you know, we will not, you know, give, you know, this clarification. You know, we do think that as I mentioned earlier, it's a combination of the various market segments that's gonna contribute to a higher, bookings or order intake for us in the third quarter and the fourth quarter, compared to the second quarter.
Okay. The second quarter is, the market share gains that you expect to make in memory in both epitaxy over the course of the quarter, did you make any tangible progress as in application wins or design wins or client feedback that really gives you that comfort that indeed, what you communicated at the last Capital Market Day is indeed still on track?
I think we are very much still on track. You know, I think we are still, slowly but surely, you know, gaining whatever we can in terms of market share for memory due to increasing adoption of high-k metal gate for DRAM and, you know, ALD gap-fill for 3D NAND. Volume is small again, like it's relatively small again, like I mentioned earlier, but, you know, there isn't really much, you know, investments going on. Whatever we can get, you know, can be, you know, attributed to, you know, market share gains. I think on the, what you referred to as epitaxy, I think we are making progress, you know, in both, let's say the advanced CMOS area.
Hopefully, the transition to, you know, Gate-All-Around is gonna help us further. At the same time, as we have always mentioned in the power analog wafer, you know, we have seen increasing adoption of our new products called the Intrepid ESA by our customers, and we do believe that that is also helping us to increase our market share.
Okay, thanks.
Thanks, Mark.
The next question is from Simon Coles with Barclays. Please go ahead. Mr. Coles, your line is open.
Hi. Thanks for taking the questions. I just wanted to follow up on the 4Q orders comment being better than 2Q. Why are you not willing to commit to it being higher than 3Q just yet? Is it still sort of the market outlook is too uncertain, or can we how should we consider sort of what you mean for meaningful pilot orders in 4Q? Just trying to square those moving parts. Thank you.
Well, I think we have actually already deviated by, you know, kind of providing more color because we have actually stopped, you know, providing any kind of guidance as far as bookings, and for a good reason. You know, I think when you look back maybe 18 months ago, you know, bookings were coming in, you know, very much higher. You know, it was kind of difficult to, you know, predict, and that's why we decided to stop doing that. I think we are also now in a situation, in a market where, you know, there is quite some uncertainty, but, you know, our belief and based on our forecast, we do believe that the fourth quarter and the third quarter, compared to the second quarter, we will have higher order intakes.
Okay, great. Thank you. Just one quick follow-up. You seem pretty confident on these pilot line orders, you've had two customers confirm. Could we expect that those orders will convert to revenue slightly quicker than the sort of six to eight-month lead times that we're used to at the moment?
I think it will be a mixture, and the reason for that is, you know, some of the, we, you know, amongst our customers, some of them order based on, you know, the lead times. Some of them, they work together with us based on forecasts, which means that they do not necessarily just place orders, you know, according to lead times. Sometimes it can be shorter, so it's going to be a mixture.
Okay, great. Thanks very much.
Thank you, Simon.
The next question is from Ruben Devos, with Kepler Cheuvreux. Please go ahead.
Yes, good afternoon. I'm just left with a question on the balance sheet and cash allocation, basically. Even in a year with CapEx spend between EUR 150 million-EUR 200 million, about EUR 100 million in share buyback, it seems you'll still materially expand your cash position. That's not taking into account the stake in ASMPT, which has also risen drastically. I believe that next year you'll trend well beyond the EUR 600 million minimum net cash position, which you talked about in the past.
Is it reasonable to assume that you could sort of step up cash remunerations going forward, or would you also like to keep some buffer, let's say, for potential M&A, such as, for LPE, where you diversify tech exposure and client exposure? Thank you.
Yeah. On cash flow, indeed, it will of course, ultimately depend on how the results develop, our level of profitability, our CapEx, et cetera. Yes, typically, we have a good cash delivery. Basically, capital allocation has not changed, compared to what was communicated, strong balance sheet remains a key priority. Indeed, we target around EUR 600 million cash balance, or maybe slightly more, but anyhow, around that level. Sustainable dividends. We'll see if we increase or not increase, we'll decide that next year when we have more visibility and excess cash will go back to shareholders.
At this moment in time, we do not have, let's say, there's no current intention to, let's say, step up this cash balance. It will become part of the discussion that we have for the Investor Day, September 26. The EUR 600 million will be reviewed again, if that's still the number that we want to stick to. For now, it's EUR 600, and before the Investor Day, I think it's too early to see if there will be a change or not. That we still have to decide upon, to be honest.
All right. Thank you. Could you just provide a brief comment maybe on your thoughts around M&A, what your strategy has been there?
Yeah. Same as what we've done, what you've seen last year. It's a more of an opportunistic strategy. Our growth strategy is mainly focused on organic growth because there's so many opportunities that we have to deal with. We scan the markets, and if there is something that we believe will further strengthen our portfolio or add something that will, let's say, support our current deposition strategy, then we might do something, but it's not, let's say, our key objective. Our growth strategy that we have, growth through innovation, is not dependent on acquisitions. It might happen-
All right. Thank you very much.
Yeah. It's not planned for now. It's opportunistic, as I said.
Okay. Thank you.
Thank you, Ruben.
The last question is a follow-up from Didier Scemama with Bank of America. Please go ahead.
Thanks for squeezing me in. I've got one question on Gate-All-Around, specifically maybe for Benjamin. Is the type of ALD equipment used in Gate-All-Around layers different from the traditional ALD equipment? Are there any specific new materials or gases being introduced in the transition to nanosheets? Just wanted to understand if there is anything, you know, materially new in terms of technologies or specifically gross margin or Sorry, ASPs and gross margin for Gate-All-Around for your company.
Didier, sure. Again, you know, when we move from FinFET to Gate-All-Around, there are quite some ALD layers that moves together. You know, for those, there isn't any material change. You know, it's just from one node to the other. Of course, when you get to Gate-All-Around, and you have, you know, mentioned that, you know, very correctly, there are certain new materials that are being used. You know, these new materials, of course, are being used for the first time, for example, and, you know, of course, the application by itself needs to be developed and, you know, together with the customer and, of course, qualified. Those are the new materials that I would say, you know, that are driving new ALD applications.
You know, when we get to, you know, September 26 at our Investor Day, we hope to provide more color on exactly what we are seeing in terms of, you know, especially changes, you know, from FinFET to Gate-All-Around. On the ASPs, again, I think it's always a mixed bag. Some will be higher, some will be lower. At this moment, we are not going to comment on that.
Okay. Maybe one quick follow-up. I think if you look at third-party data, I mean, they, they pin your market share in single single wafer ALD at, you know, anything between 55%-58%. Obviously, your market share in logic foundry, I think you've publicly said, is materially higher than that. Can you share with us roughly what your market share in logic foundry might be in ALD? I mean, is it closer to 65% or 70%? Can we also assume that it's gonna be even higher, given the comment you made just now on the new material introduction for Gate-All-Around? Thank you.
Again, Didier, we don't give the breakdown between the memory and logic foundry. Then, but you are correct. It's, you know, the 55-58 is the average. Of course, you know, we have a much larger play in logic and foundry compared to a memory. We will, you know, take this into consideration. I'm not 100% sure whether we will share this at the Investor Day, but I think we will probably just continue to, you know, guide or share that what is our market share, you know, instead of breaking it down, because it's quite sensitive and competitive.
No, I understood. Thank you so much.
Thank you, Didier.
Mr. Benjamin Loh, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.
Thank you very much, on behalf also of Paul and Victor, I want to thank everybody for attending our call today. We do hope to see many of you at our Investor Day in September. In the meantime, stay safe and goodbye.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.