Good day, welcome to the ASM International Q3 2018 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Victor Bareño. Please go ahead, sir.
Thank you, Anna. ASMI issued its 2018 third-quarter results last evening. For those of you who have not yet seen the press release, it, along with our latest investor presentation, is accessible on our website, asm.com. As always, we remind you that this conference call may contain information relating to ASMI's future business or results, in addition to historical information. For more information on the risk factors related to such forward-looking statements, please refer to the company's press releases, reports, and financial statements, which are available on our website. With that, I'll turn the call over to Chuck del Prado, President and CEO of ASMI. Chuck?
Thank you, Victor, and thanks to everyone for attending our third-quarter 2018 results conference call, and also for your continuing interest in the company. After a review of operations, Peter van Bommel, our CFO, will join me in answering any questions that you may have. Let's start with a review of the third quarter financial results. Net sales in the quarter decreased by 6% compared to the second quarter and increased by 10% from the third quarter of last year. At the level of EUR 196 million, third quarter sales were towards the higher end of our guidance, which was a range between EUR 180 million and EUR 200 million. Service and spare parts accounted for 24% of total sales in the third quarter and were up 14%, year-on-year. Equipment sales were led by our ALD business, but we also recorded healthy sales levels in our other product lines.
By industry segment, revenue in the quarter was led by Foundry, followed by Memory, and then Logic. Within Memory, the larger part of sales was related to DRAM investments, while NAND sales decreased compared to the second quarter as expected. The gross margin amounted to 41% in the third quarter, a decrease compared to 42% in Q2 and an increase from 39% in the year-ago period. The decrease compared to the second quarter is largely explained by the higher cost on evaluation tools, reflecting an increase in customer engagements for new products and applications. As earlier indicated, while remaining within the target range of low to mid-40s, our gross margin is expected to show a somewhat higher volatility in the next three quarters than we have seen in previous years.
This expected higher volatility is mainly explained by a healthy pipeline of new products that we are bringing to the market, which initially might lead to some extra costs. In addition, from quarter to quarter, the gross margin may be impacted by changes in the sales mix, as well as costs associated with our preparations for expansion. As discussed at earlier occasions, these preparations for expansion include a step-up of our service organization, as well as the construction of two new facilities. In October this year, we completed our new facility in Dongtan, Korea. This new facility includes an expanded state-of-the-art R&D lab and is much closer located to our key customer in Korea. Preparations for the construction of a new manufacturing facility in Singapore are ongoing.
If we look at the operating expenses, SG&A increased by 2% from the second quarter, while R&D increased by 10%, mainly due to lower capitalization. The operating result decreased to EUR 28 million, down from EUR 38 million in the second quarter, which is for the largest part explained by the lower revenue. Operating results increased with EUR 7 million compared to EUR 21 million in the third quarter of last year. Financing results in the third quarter included a currency translation gain of EUR 1 million. This compares to a translation gain of EUR 8 million in the second quarter and a translation loss of EUR 8 million in the third quarter of last year. Net earnings on a normalized basis amounted to EUR 42 million, down from EUR 20 million from the second quarter and about unchanged compared to the third quarter of last year.
Looking at ASMPT, normalized results from investments, which reflect our share of approximately 25% in the net earnings of ASMPT, decreased to EUR 17 million for the quarter, down from EUR 22 million in the second quarter. In the third quarter, ASMPT had sales of $658 million, down 2% from the second quarter and up 1% year-on-year. Bookings in the third quarter decreased 15% compared to Q2, but increased 8% year-on-year for ASMPT. The third quarter bookings of ASMPT are reflecting the seasonal correction, having said that they were at a historical high third quarter level. Now turning back to ASMI's consolidated operations. We booked orders of EUR 258 million in the third quarter, which is 25% above our previous highest level in the history of the company, well above the range of EUR 200 million-EUR 230 million that we had guided for.
Orders increased strongly by 47% compared to Q2, by 61% compared to the third quarter of last year. The upside, compared to our earlier expectations, was driven by higher than expected orders in particularly in the logic and analog segments. If we look at the ranking by industry segment, bookings in the quarter were led by logic, followed by foundry, then analog. Logic bookings increased sharply compared to Q2, foundry bookings were solid and also increased compared to Q2, driven by further spending on the seven nanometer node as well as early investments in the five nanometer node. Also in analog, bookings jumped sharply compared to Q2. In the memory segment, total orders dropped compared to the previous quarter, driven by a sequential decrease in DRAM, while NAND remained at a relatively low level. By product line, orders in the quarter were driven by our ALD business.
In epitaxy, we had high bookings driven by strong demand in analog power. Vertical furnace bookings were also healthy, driven by logic and analog. Now turning to the balance sheet and cash flow. At the end of September, the cash position dropped to EUR 266 million, down from EUR 651 million at the end of June. This decrease is fully explained by a total of EUR 383 million that we returned to shareholders during the quarter in the form of share buybacks and the capital repayment. During the quarter, we also received EUR 15 million in dividends from ASMPT, while the operating free cash flow was EUR 17 million negative. The latter is mainly caused by an increase in our working capital to EUR 225 million at the end of September, up from EUR 213 million at the end of June.
This in turn is mainly explained by inventories, which were higher at the end of the third quarter, in preparation of expected higher sales in the fourth quarter, and because we got early receipts from suppliers as tight conditions in the supply chain loosened somewhat in the third quarter. If we look back in more detail at the share buyback, during the third quarter, we spent EUR 167 million to buy back 3.7 million of our own shares at an average share price of about EUR 45. This was part of, as you well know, of the 250 million share buyback program that we started last June. As a reminder, this share buyback program was funded with parts of the proceeds of the 9% stake sale in ASMPT that we executed in November of last year.
We used the other part, a bit over EUR 200 million, for the tax-efficient capital repayment of EUR 4 per share. This was paid out to our shareholders on August 10 of this year. Furthermore, during the quarter, the earlier announced cancellation of 6 million of our treasury shares became effective. The number of outstanding shares at the end of September, net of treasury shares, amounted to approximately 50 million shares. This is a decrease of 14% compared to the share count at the end of Q3 last year. Following the end of the third quarter, on October 15, we completed the EUR 250 million buyback program. In total, we have repurchased slightly over 5.4 million shares at an average price of almost EUR 46 under this program. As communicated before, we intend to cancel the shares that we have repurchased under this program.
In 2018, year-to-date, and including the share buybacks in October, we have returned a total of EUR 607 million to our shareholders in the form of annual dividend, the tax-efficient capital return, and share buybacks. This is up from a total of EUR 285 million that we returned to shareholders last year. Let's now take a closer look at the trends that we see in our markets. The semiconductor end markets have shown solid growth so far this year and are expected to grow a low double-digit percentage in 2018. However, against the backdrop of rising inventories and increased price pressure in primarily the memory segments and the macroeconomic risks related to trade frictions. Market research firms are forecasting growth of the semiconductor end markets to slow down in the coming quarters.
Looking at the WFE market, the wafer fab equipment market, we expect growth in 2018 to be in mid to high single digits. Drivers behind this growth of WFE are still expected to be the logic and DRAM segments, while our view is that the spending in 3D NAND will be down year-over-year. Spending in the second half of 2018 is expected to be lower than in the first half of the year for the WFE market as a whole, due to a drop in memory. This is unchanged compared to our expectation that we shared with you three months ago. For ASM, we expect our sales for the second quarter to increase strongly compared to the first half. The key drivers behind this sequential increase are logic, foundry, analog, and to a lesser extent, DRAM.
Our NAND sales are expected to lower in the second half, which is fully in line with our previous expectations and guidance to the market. We still expect to outperform WFE this year. An important factor that supports our expected outperformance compared to WFE in the second half of the year is our strong exposure to the logic and foundry sector. In fact, our exposure to logic foundry has substantially increased over the last couple of years. As we highlighted on previous occasions, with the transition to the most advanced nodes, our relevant SAM, our served available market, in logic and foundry has significantly increased, including a meaningful increase in the number of ALD layers. This has helped us to achieve a substantial share of wallet gains with key customers in the logic and foundry sector.
To further illustrate this point, in the first three quarters of 2018, and also in the full year of 2017, our non-memory markets, of which foundry and logic are the biggest parts, accounted for clearly more than half of our total sales. Looking in more detail at WFE in the logic sector, while the mix of the different nodes has somewhat changed during the year, spending in the advanced logic segment is clearly higher in 2018 compared to last year. Looking at foundry, spending is still expected to be lower this year, albeit still at a healthy level, and is driven by further seven-nanometer investments as well as the first investments in five-nanometer. Investments for the five-nanometer node are likely to further increase in the course of next year.
We repeat our expectation that the five-nanometer foundry node is going to be an important transition for our company, with good opportunities to expand our position with multiple new ALD applications/layers and to increase our overall share of wallet in foundry. Hence, foundry has the potential to be a strong contributor to the company's 2019 revenue. The DRAM segment is still expected to show solid growth within the WFE market in 2018. For ASM, DRAM is also one of the drivers behind higher sales this year. We remain strongly focused on broadening our position in DRAM to new ALD solutions beyond our traditional position in pattern. We aim to achieve the first contribution of these new solutions once customers start to invest more meaningfully in the next nodes. Now turning to 3D NAND.
As we already discussed in our Q1 and Q2 earnings call, WFE spending in the NAND segment is coming down significantly in the second half of this year. Also for the full year of 2018, NAND spending is expected to be lower in our view. This correction is not unexpected. Customers made strong investments in both new capacity and 3D-NAND conversions over the last few years, including the first half of 2018, and are currently digesting these investments. A recovery in investment in the NAND segment will likely be driven by the transition to the next device generations of 90-plus layers, which customers are planning to start ramping no earlier than the second half of next year. Our focus is to continue working with customers on these next device generations that are expected to need an increased number of advanced single wafer ALD applications.
We still plan to increase the part of the 3D-NAND ALD market that we address. This quarter, we also highlighted the record high order intake in the analog segment. While this segment is clearly smaller than logic or foundry, it has a meaningful contribution to the increase in our bookings in the quarter. Demand in analog was driven by a broad base of customers across the globe for products such as power devices and IoT-related products. In terms of product lines, the strong demand in analog contributed to higher bookings in vertical furnaces and in our Epi business in the quarter. For the full year 2018, we expect a marked step up in our analog sales compared to relatively steady levels in the previous years. The structural outlook for the ALD market remains strong. ALD continues to be a key enabler of Moore's Law.
An increasing number of ALD steps will be needed to help create the smaller geometries, new materials, and more complex device architectures that are on our customers' roadmap. In addition, we remain focused on expanding our served available market within the total ALD market, including parts of the market that we have so far not yet addressed. Our new Synergis product that we launched this past summer at SEMICON West, is an important next step in this growth strategy. By the end of the year, we expect to have booked multiple orders of this new ALD tool with a further increase foreseen in 2019. Looking at the solid momentum in our other product lines in recent quarters, Epi and furnaces, we are strengthened in our belief that the combined revenue of the other product lines will have a structurally higher contribution for the company in the coming years.
Let's now take a short look at our Q4 guidance as we communicated in our overnight press release. For Q4, on a currency comparable level, we expect sales of between EUR 220 million and EUR 250 million, and an order intake between EUR 250 million and EUR 260 million. We added the comment that Q4 still reflects some uncertainty around the exact timing of individual tools. That concludes our introduction, including our outlook. At this point, Peter and I are more than happy to answer any questions that you may have.
We'd like to ask you to please limit your questions to not more than two at a time, so that everybody has a chance to ask a question. All right, Anna, we are ready for the first question.
Thank you, ladies and gentlemen. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Peter Olofsen from Kepler Cheuvreux. Please go ahead.
Yes. Good afternoon, gentlemen. My first question is on the order guidance for Q4, which looks pretty strong. I understand there was a solid contribution from Foundry in Q3. To what extent will you see further contribution from the seven nanometer build-out to the Q4 order intake, or is that build-out nearing its completion? Is it fair to assume that some of the opportunities that you talked about in NAND and DRAM, won't yet have a big contribution to the Q4 order intake, and that's maybe more for next year? Then I have a follow-up, please.
Okay, Peter. Thanks for your question. Pretty straightforward answers to your questions. First of all, will Foundry is expected to have a solid contribution also to Q4 bookings? The answer to that is clearly yes. Secondly, on new NAND and DRAM contribution to Q4 bookings. It's very well possible that memory contribution to bookings will go up Q on Q, but more in the DRAM space maybe than in the NAND space, but more focused on existing applications. New applications really are more related to, let's say, ramping of new nodes, and that's not to be expected before the new year kicks in.
Okay. Just to clarify, the Foundry will still be mainly 7 nanometer related?
I think more and more you are seeing that the spending in Foundry is shifting to 5.
Okay.
We saw earlier in the year, let's say the ratio of 7 to 5 was more in favor of 7, but in the course of the year, it shifted more towards 5, and that's to be certainly for bookings Q4 will be more related to 5.
Okay. A more strategic question. Some of your competitors can combine different competencies because they are active in deposition, but also in etch, clean, and inspection. With chip making getting more and more complex, would that put you potentially at a disadvantage, or is it something you may try to solve by working together with other players in the industry?
Our growth strategy takes very well into account that we are not active, let's say, in core etch. We don't see a limitation, let's say, in the next couple of years, in any way for us to grow.
Thank you.
Okay. You're welcome.
Thank you. We take our next question from Nigel van Putten from Kempen. Please go ahead.
Hi. Afternoon. Thanks for taking my questions. It's great to see analog is picking up strongly. You already provided some context, it's broad-based. Could you also provide some indication of, is this a one-off? This is a temporary spike. Do you expect this to continue well into the next year? What will be driving it? That's my first question. Thanks.
Yeah, Nigel, first of all, we absolutely don't think this is an incidental thing. Will there be some cycles that certain periods of time it will be stronger than other periods of time? That for sure will be the case, like in every industry segment. We really see, if you look at the underlying end markets such as industrial and automotive, those are really long-term drivers of growth of this analog market. We see a pretty bright future in these segments in the coming years. We've worked hard to position ourselves well in that market, and we are continuing to adjust some of our configurations in several product lines, to even more tune those to the needs of these markets. Specifically, we've seen bookings significantly increase in the analog market Q on Q and in Q3.
Our expectation is that, at least in the short term, the strength will stay. How it will develop in the course of 2019, that's of course, too early to say. If you look in the short term, we have pretty good visibility on a solid climate there, based on the feedback from our customers today and the way the backlog has built in this segment.
Great. Thanks. Indeed on visibility also in the foundry and logic segment, I think logic's strong. Maybe we've seen a CapEx bump at a big IDM helping this quarter, maybe also the coming quarters. Also, to what extent do you see that maybe going into 2019? I know it's early days, but is that also mostly first half related, or could that be longer in the year? Also on foundry, we've seen reuse of equipment from 10 to 7, and now moving from 7 to 7 plus. You flag, obviously, the investments of five nanometer picking up quite strongly. How should we see that in terms of, on the foundry side, will that be enough to offset, maybe reuse? In logic specifically, do you expect that spend to be maybe a bit more 1H-weighted versus the rest of the year?
Is that too early to call still?
Yeah. Of course, our visibility is best for the first half of this moment in time. Looking at the full year so far, logic in general for the market in general is expected to be reasonably healthy. Assuming that the 10 nanometer ramp will continue to get the focus that has been developed in advanced logic, let's say, in the course of this year. Under the assumption that 10 nanometer continues to get focus, 2019 could be a very healthy year for logic. For foundry, it's really determined by the spending plans for 5 nanometer. So far the feedback from foundry customers is that there's a very strong commitment to build initial capacity in the 5 nanometer node. In the course of 2019, we of course will see the level of wafer starts that really are needed by end markets in the foundry space.
The initial commitment to get the ramp going in 5 nanometers, the commitments we have recognized to be very, very strong. That's what we're serving at this moment in time. When we view also it as a very strong opportunity for ASM, this transition from 7 to 5. We view it as a much stronger opportunity to build, to further increase our share of wallet than the transition from 10 to 7. As you may remember, 16 to 10 was a tremendous opportunity for us to increase the amount of layers, increase share of wallet, and the transition from 7 to 5 we perceive as a similar opportunity. We're very happy with the developments so far. Yeah, in terms of reuse, we have seen some reuse in the 7 nanometer node, going from 10 to 7.
Somehow, also given the fact that we are engaged with more applications now, we trust that there's, let's say, a bigger opportunity to build a healthy revenue level in 5 nanometer than in 7.
Much appreciated. Thanks.
We will take our next question from Kwan Lee from Credit Suisse. Please go ahead.
Hi. Thank you for taking my question. My first question will be regarding your gross margin. Obviously, you said it was down quarter-on-quarter in Q3, and you are still seeing there could be some volatility in terms of higher number of evaluation tools. In Q4, I'm not sure what is your visibility right now, but do you see gross margins still in your low 40s? And is it going to be up or down from Q3?
Yeah, let me answer that, Kwan Lee. What we have seen, or we always have said, is that our gross margin will be in the low to mid-40s. We have seen somewhat more volatility this year due to the introduction of new products. We have explained also in the previous quarters, because there were a few things which were jumping, especially the introduction of the Intrepid and PECVD. Those margins are now more or less on the normal levels. We are back in that low to mid-40s on a more structural way. As we have seen now in Q3, the impact was mostly of the eval things. The mix in general in the third quarter of our products was more at the lower side than on the upper side than what we have seen in previous quarters.
We would be disappointed a little bit when the margin in the fourth quarter would not be a little bit higher than what we have seen in the third quarter.
You expect Q4 to be higher, and otherwise, you would be disappointed. That's how I understand. Another question of mine will be regarding your outlook, whether it's WFE or on your site only for 2019. Obviously, we received your outlook for 2018, but do you have any visibility beyond that?
We gave some comment based on the former question on 2019, but I assume you are looking at the market as a whole. On 2018, first on 2018, we've been very consistent in our guidance to the market from the beginning of the year. Initially, at the early start of the year, we guided for, let's say, high single-digit growth in 2018. We adjusted it to mid to high single digit, and we stuck to that guidance throughout the year, and it now seems to really show that that was the right guidance on the market as a whole. We also commented earlier on in the year when the projections for next year were aggressively negative, in the 20s, minus 20% negative.
We thought that that was too much, given the fact that some of the slowdown, especially in memory, already was happening in the course of this year. You saw also industry analysts in the course of the year adjusting their number for 2019 downwards, in a way, less negative. Now the common denominator is somewhere in the high single digits negative. That's between 8%-10% negative or so for next year. At this moment in time, with the visibility we have, we tend to concur with that projection. Then the assumption, again, that logic will stay reasonably healthy in 2019. Again, assuming that 10-nanometer ramp will get continued focus. Foundry expected to be up, driven by five nanometer. DRAM to maybe year-over-year drop somewhat after two very strong years of strong spending.
Although there is a year-over-year drop, still a decent contribution throughout the year on a quarterly basis. For NAND, we expect that the first half will still be weak of next year, in line with also a somewhat weak second half of this year. Possibly in the second half of next year, that NAND will start to spend overall a little bit more in the 96 stack, in the 90-plus stacks and beyond. That's the color we can give based on the visibility we have from our customers today.
That's very clear. Thank you.
You're welcome.
Once again, ladies and gentlemen, if you would like to ask a question, please press star one. We will take our next question from Rob Sanders from Deutsche Bank. Please go ahead.
Yeah, it is Deutsche Bank, not Deutsche Bank. Thanks for taking my question. Just related to the previous question, if logic and foundry are going to be relatively strong next year, and that is where you have your highest market share in ALD and where you are the primary source to the two largest players, does that have any effect on your mix and your gross margin as we look into 2019? I have a follow-up. Thanks.
We have no big differences in gross margins with the different customers that we have.
Okay. Got it. Just related to your commentary about 5 nanometer and 10 nanometer in the big. Sorry, go ahead.
The gross margin mix is more related to certain applications that we have. That can differ per customer, of course, sort of applications that you have, but not in the customer as a whole.
Got it. Just one thing that struck me is that you say that your large foundry customer has started five nanometer quite aggressively. The large IDM is planning to do 10 nanometer next year. I'm just surprised your order book has swollen so much so soon, given you have a three-month lead time. What explains-- A lot of people might look at these numbers and say, this is very lumpy, and it's not likely to repeat. This is kind of orders that are being pulled in. What explains the kind of earlier than expected timing for these orders that you've seen in Q3 and Q4 relative to what most people talk about being the ramp schedules, which is obviously five nanometer foundry in 2020 and the big IDM 10 nano next year? Thanks.
Yeah. Okay. First to clarify, because maybe we have not been completely clear on that. We did not state that the foundry is aggressively ramping. We said that the investment levels for foundries in the course of the year shifted more from seven to five, but it is really early, let's say pilot production that is being built now and real ramp preparations will need to happen in the course of 2019, and that preparing for a solid wafer start out, high volume wafer starts out in 2020. This is really an early start, but we are heavily engaged in that early start in the foundry space. That's what you are seeing now.
On 10 nanometer, you saw that in the course of the year, that's our assessment, that in the course of the year in logic, in advanced logic, more of the bookings started to shift from 14 to 10. We are not about the exact timing of our customers in ramping their wafers, but they are at least more and more building capacity now based on the order book that we have for 10 than on 14. That's what we are seeing. Just clarifying some of that. You said if this is a one-time bump for us, I think maybe you can read it a little differently. As you very well know, that when you started also the coverage on the company, which we are very happy with, is that you know that we have a relative strength in logic foundry versus memory.
That is a very important data point that you have to take into account in looking at ASMI. Secondly, it's very important to know that we have shared with you and with the market over the last couple of quarters that we are aggressively working on increasing our share of wallet Going to new nodes. In foundry going to five, in logic going to 10, and that we, besides that, also are aggressively working on expanding our shared available market, not only in ALD, but also in the other product lines. If you combine that then with the fact that logic and foundry in general are spending more in the second half than in the first half, as we have also guided the market for, since the beginning of the year.
While memory is slowing down, especially NAND, that explains for a big part that as a result of that, our Q3, and potentially Q4 orders are, our strong contributors there are logic foundry and to a lesser extent, analog. That's basically the story.
Great. Thank you very much.
You're welcome.
We will take our next question from David O'Connor, Exane BNP Paribas. Please go ahead.
Great. Good afternoon. Thanks for taking my questions. Maybe firstly on the linearity of orders in advanced logic. The strength we're seeing in logic in Q3 and again in Q4, the order bookings. In the past, what has been the duration of the logic order strength when a new node ramps? That's my first question, then the follow-up.
Can you repeat one more time? Sorry. David, can you repeat one more time your first question?
Yeah, sure. Just want to get a sense for how the duration of strength that we could see in the advanced logic at the 10 nanometer ramp. Just wondering in the past, for instance, at the 14 nanometer, how long does the initial ramp-up last? Is it a one to two quarter kind of bump, or do you see three to four quarters and it tails off after that? Just trying to get a sense of the duration of this order strength on the advanced logic side.
Yeah. That's very difficult to assess, David. We would love to give you a little bit more guidance on that. The only thing we can say is that, in logic, this node was basically at an early announcement some time ago, in 2016. The customer really took time to prepare the ramp. Now we really see a meaningful momentum developing like we have not seen any time before, since they made that announcement in 2016. How long it will last, that's not for us to comment on. The only thing we are focused on is to position ourselves well with multiple product lines. Again, we saw already earlier on, we basically built the foundation for this ramp. The bookings development now is not something of today.
It's something we've worked on over the last three, four years to really increase our share of what, in this node, which would become visible as soon as the customer would ramp. That's basically what's happening now.
Okay. Got it. Just to clarify, my question is more on the previous node. Looking back at the 14 nanometer node, do all those orders come in one quarter to two quarters, or is it more spread out over a couple of quarters?
That's spread out. That has been spread out. If you look at the history for you, it has been spread out.
Okay. Got it. Then maybe a follow-up. When you look at this current 10 nanometer advanced logic and compare that to five nanometer foundry, how would you compare them in terms of ALD intensity? Thanks.
You were within foundry, you said? Or
Well, between the 5 nanometer foundry and what you see in advanced logic 10 nanometer. Could you give some kind of sense of how they compare in terms of ALD intensity?
Well, what we can say is that in both instances, in logic, the ALD intensity has increased, going from 16 to 10 in a significant way in terms of amount of layers. The same is happening going from seven to five in the foundry space. Then, of course, combined with that, you have the amount of layers with which you have penetrated, and then for the rest, it's how many wafer starts the customer is going to make. Which determines ultimately how much revenue you will generate. That's as far as I would like to go in commenting in this forum, David.
Very helpful. Thank you.
You're welcome, David. Thank you for your questions.
We will take our next question from Marc Hesselink from ING. Please go ahead.
Thank you. The first question is maybe a little bit of a follow-up still on the last one. If you see the shift from 7 nanometer to 5 nanometer, what does it do for the ALD intensity? Also taking into account that they will be using EUV in that node. If you're talking about that's going to be a big node, does it have to do with the fact that there will be more wafer starts, or is it really the ALD intensity that's also really a step up there?
What's relevant to us is both. If your question is our engagement in terms of ALD layers going down, going from 7 to 5 as a result of EUV, we have to compensate that with wafer starts, the answer is no.
Okay. Clear. The other question is on the evaluation tools. What does that mean for going forward? Does it mean that there is a big opportunities with new applications, new clients going forward because you have so many evaluation tools in the field at this stage?
What we normally do is, when we introduce new products in the field, for a period of time, mostly for six to 12 months, we place a so-called eval tool with the customer. He can align his processes with our tool. When that works out well, he buys that tool, and afterwards he will buy equipment in high volume manufacturing. We have seen this year, you see that also on the balance sheet, how that was developing. You saw that we have nearly EUR 20 million more of eval tools on this moment outstanding at our customers. That's representing the volume of new activities that we have started up in the past period.
Especially for complete new tools, for new applications, we deliver those sort of eval tools. We are on this moment heavily working together with customers. That is also one of the underpinning factors why we expect that our order intake is as what it is in Q3, is also the basis of the further guidance that we have given for the fourth quarter.
Okay. Maybe as a final question, yes, we see the weakness in 3D-NAND. Given the fact that you're still trying to get more application in 3D-NAND, what should it imply for you? Could it be that even if the market is down, because of the fact that you're getting more application, that you still can grow your 3D-NAND revenues?
Your question, if we can grow our NAND revenue regardless of the climate in the NAND space?
Yeah, actually, given the fact that you didn't have all the applications.
Yeah. Yeah, okay. I understand your question. That makes sense, your question indeed. Again, the opportunities we are focused on to expand the number of applications in NAND are in, let's say, the more advanced techs. The investments in the advanced techs are low at this moment in time. In that respect, we are also depending for that expansion on our customers reengaging in their commitment on ramping the newer nodes.
Okay. That's clear. Thank you.
Yeah, you're welcome.
We will take our next question from Edwin de Jong from NIBC. Please go ahead.
Good afternoon, gentlemen. A few questions left. On analog, in your prepared remarks, you said that could become a little bit more significant for the top line of ASMI. Could you maybe give some more color of what percentage of sales it is now, more or less, and what percentage you see it going to in the next few years? That's my first question, and then I have a follow-up.
Yeah. That's a tough one. Let's put it this way, that coming from a low base, let's say, the bookings much more than doubled Q on Q.
Okay.
Going from Q2 to Q3, but we're not going to give percentages. As we guided for it, the number three segment behind the logic and foundry in Q3, in terms of bookings. Let's say above the memory in Q3. That should give you some color also.
Okay. Maybe on the working capital, also going forward, especially inventories had a high step up there to EUR 185 million Q3. Can you give some color on how that could develop with the ramp that you are currently seeing in Q4 and maybe Q1?
Yeah. Working capital, EUR 185 inventories indeed, in our view, too high, Edwin, let's mention that also. There are a few elements in it, which I think are important in this moment. First of all, when you look to the different elements of the inventories, you have to look to, on the one hand, the work in progress. The work in progress is a function in principle for the throughput time and the volume of orders that we have. That looks very healthy. There's no issue with the inventories in that area. When you look to our spares, you see that gradually increasing. That's also in a lot of cases, in preparation of the new activities, when you have a lot of new products with a lot of new customers, you need to have more spares.
That's also developing in line with the activity level that we see. We have seen some finished goods from this moment increasing in the past, especially in the third quarter. That's normally is that very stable on a very low level because in principle, we do not have much finished goods. That's more a short time issue. When a customer decides not to get the orders of the equipment delivered at the end of that quarter, but early in the next quarter, that's also something which we'll be phasing out rather quickly, that had an impact of approximately EUR 10 million on inventories in the third quarter. The most important one is the raw materials. The raw materials are in principle a function of the activities that you're going to do. Here are the issues that we have on this moment.
On the one hand, of course, we need more raw materials at the end of the quarter for the start of the new quarter. You can imagine when we give a guidance, which is substantially above the level before, that we need more raw materials, that's a healthy part. On the other hand, we have been confronted in the past period that the full supply chain was heavily loaded. As a consequence of that, the lead times of our suppliers were increasing, and that has led to the situation that we ordered more in advance than what we have done before. Now that the supply chain has less orders, even cancellations, you see now that our suppliers are delivering within the lead time or even sometimes much shorter, and that has caused to a certain overstock situation at the end of this quarter.
That is something where we are working on with the organization, because that has to reduce and highly likely you will see the first results of that already by the end of this quarter.
Is it also, let's say, EUR 5 million-EUR 10 million, or?
That is more than EUR 5 million-EUR 10 million.
Okay. Very clear. Thank you.
We will take our next question from Nigel van Putten from Kempen. Please go ahead.
Hi. Thanks. Just a couple of quick clarifications. First off, on your comment saying non-memory is well over half of the revenue in this year and recent years. That's over the entire product portfolio, right? If we look specifically to ALD, that could be the other way around. Is that correct?
That's all products.
Yeah. Okay. Clear. On R&D capitalization, amortization, still quite high level of capitalization the quarter. I think next year, at least amortization is probably going to increase quite a lot. Is capitalization expected to stay at the current level, or is it also coming down? Is it going to be higher amortization, lower capitalization, or is there an effect of canceling the two out?
I expect that capitalization will be slightly higher than what we have seen in the past, I don't expect that 2019 will show a level what we have seen before in 2017. I do not expect 2019, the capitalization to be as high as it was in 2018. Hence, it's very strongly dependent on sort of the development projects that we have, when they exactly finalize that, because what I explained in previous calls is that the more that you reach the end level of a development project and when that looks rather successful, then according to IFRS, we have to capitalize, and then we are also capitalizing that. We have seen those impacts, in principle, peaking in the second quarter. We saw a small reduction in the third quarter.
I expect in the fourth quarter that the capitalization will not be higher than what we have seen in the third quarter. Will it be much lower? That is, I think, too early to judge from this moment.
Okay. Thanks, Peter. Thanks, Chuck.
You're welcome.
We will take our last question from Peter Olofsen from Kepler Cheuvreux. Please go ahead.
Sorry, I was on mute. I had a follow-up on epitaxy in foundry, where you had a breakthrough, I think, in 2017, at the seven nanometer, with the foundry customer to go to five nanometer. Will that have a positive impact, in terms of number of layers, number of applications, that you may address with your Epi product?
We expect to improve our position, going from seven to five.
That is somewhat similar to what you see in ALDs because the number of applications is increasing and the number of layers is going up.
We really intend to gradually strengthen our position in mainstream CMOS in, let's say, in the industry, logic foundry memory. We see indeed the shift from 7 to 5 as an opportunity to make a step there also. We trust we will see the results on that in Epi foundry also in 2019.
The progress so far, is it still this
Of course, you cannot compare it with ALD, because ALD of course, has a much broader application space in number of layers. We do expect to expand our engagements. The answer there is yes.
The progress so far, is it still with this initial foundry customer, or is it also with other foundry logic customers already?
Our engagement in the Epi space has been already for, let's say, a couple of years broader than just this, let's say this HVM engagement, this high volume engagement. We're working very hard to also get, let's say, broader traction in 2019, 2020, beyond this engagement. It's just too early to claim victory there, Peter. It's a very relevant question, and your question also fits completely with our ambition and with the Epi strategy that we set out as a company a few years ago.
Okay. That's all. Thank you.
Okay. You're welcome, Peter. Thanks for your question.
Thank you. It appears there are no further questions at this time. I would like to turn the conference over to CEO, Mr. Del Prado, for any closing remarks.
Yes, Anna. Thank you. Thank you everybody for attending the call today on this day, I understood with a few other conference calls. Thank you that you still were all able to make it. Of course, feel free to contact us directly or through Victor, with any further questions you may have on this overnight release. I'm looking forward to staying in touch with you on future roadshows or any other event that we can schedule. Thanks again, and have a very good day.