Good day, and welcome to the SAM 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 Bareno. Please go ahead, sir.
Thank you, Anna. ASMI issued its 2018 Q3 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 ASM'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.
And with that, I'll turn the call over to Chuck Delgado, President and CEO of ASMI. Chuck?
Thank you, Victor, and thanks to everyone for attending our Q3 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. So let's start with a review of the Q3 financial results. Net sales in the quarter decreased by 6% compared to the 2nd quarter and increased by 10% from the Q3 of last year. At the level of €196,000,000 3rd quarter sales were towards the higher end of our guidance, which was a range between €180,000,000 €200,000,000 Service and spare parts accounted for 24% of total sales in the Q3 and were up 14%, 1 4% 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 Q2 as expected. The gross margin amounted to 41% in the 3rd quarter, a decrease compared to 42% in Q2, an increase from 39% in the year ago period. The decrease compared to the 2nd 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 lowtomid40s, our gross margin is expected to show a somewhat higher volatility in the next few 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 2 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 and 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 then look at the operating expenses, SG and A increased by 2% from the 2nd quarter, while R and D increased by 10%, mainly due to lower capitalization. The operating result decreased to €28,000,000 down from €38,000,000 in the 2nd quarter, which is for the largest part explained by the lower revenue. Operating results increased with €7,000,000 compared to €21,000,000 in the third quarter of last year.
Financing results in the 3rd quarter included a currency translation gain of €1,000,000 and this compares to translation gain of €8,000,000 in the 2nd quarter and a translation loss of €8,000,000 in the Q3 of last year. Net earnings on a normalized basis amounted to €42,000,000 down from €20,000,000 from the 2nd quarter and about unchanged compared to the Q3 of last year. Looking at ASMPT, normalized results from investments, which reflect our share of approximately 25% in the net earnings of HMPT, decreased to €17,000,000 for the quarter, down from €22,000,000 in the 2nd quarter. In the 3rd quarter, ASMPT had sales of 6 US658 $1,000,000 down 2% from the 2nd quarter and up 1% year on year. Bookings in the Q3 decreased 15% compared to Q2, but increased 8% year on year for ASMPT.
The Q3 bookings are of PT are reflecting the seasonal correction. Having said that, they were at a historic high historical high 3rd quarter level. So now turning back to ASMI's consolidated operations. We booked orders of 258 €1,000,000 in the Q3, which is 25% above our previous highest level in the history of the company and well above the range of €200,000,000 to €230,000,000 that we had guided for. Orders increased strongly by 47% compared to Q2 and by 61% compared to the Q3 of last year.
The upside compared to our earlier expectations was driven by higher than expected orders and 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 and then Analog. Logic bookings increased sharply compared to Q2. And in Foundry bookings were solid and also increased compared to Q2, driven by further spending on the 7 nanometer node as well as early investments in the 5 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 quarter were driven by our ALD business. In epitaxy, we had high bookings, driven by strong demand in analog power. And the vertical furnace bookings were also healthy, driven by logic and analog. So now turning to the balance sheet and cash flow.
At the end of September, the cash position dropped to 266,000,000 down from 6
€51,000,000 at the end of June.
This decrease is fully explained by a total of €383,000,000 that we returned to shareholders during the quarter in the form of share buybacks and the capital repayment. During the quarter, we also received €15,000,000 in dividends from ASMPT, while the operating free cash flow was €17,000,000 negative. The latter is mainly caused by an increase in our working capital to €225,000,000 at the end of September, up from €213,000,000 to EUR13 1,000,000 at the end of June. This in turn is mainly explained by inventories, which were higher at the end of the 3rd quarter, the preparation of expected higher sales in the Q4 and because we got early receipts from suppliers as tight conditions in the supply chain loosened somewhat in the Q3. If we look back in more detail at the share buyback during the Q3, we spent EUR 167 €1,000,000 to buy back 3,700,000 of our own shares at an average share price of about 45 euros This was part of, as you well know, of the €250,000,000 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 €200,000,000 for the tax efficient capital repayment of €4 per share. This was paid out to our shareholders on August 10 this year. Furthermore, during the quarter, the earlier announced cancellation of 6,000,000 of our treasury shares became effective. The number of outstanding shares at the end of September, net of treasury shares, amounted to approximately 50,000,000 shares.
This is a decrease of 14% compared to the share count at the end of Q3 last year. Following the end of Q3, on October 15, we completed the €250,000,000 buyback program. In total, we have repurchased slightly over 5,400,000 shares at an average price of almost €46 under this program. As communicated before, we intend to cancel the shares that we have repurchased under this program. In 2018, a year to date and including the share buybacks in October, we have returned a total of 6 €7,000,000 to our shareholders in the form of annual dividend, the tax efficient capital return and share buybacks.
This is up from a total of €285,000,000 that we returned to shareholders last year. So 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 in the 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 the 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 3 d NAND will be down year over year. Spending in the second half of twenty eighteen 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 3 months ago. For ASM, we expect our sales for the 2nd 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 logic 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 SAN, 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 1st 3 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 higher at a healthy level and is driven by further 7 nanometer investments as well as the first investments in 5 nanometer. Investments for the 5 nanometer node are likely further increase in the course of next year. We repeat our expectation that the 5 nanometer foundry node is going to be an important transition for our company with good opportunities to expand our position with multiple new ALD applicationslayers 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 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 IoT solutions beyond our traditional position in patent. And 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 3 d 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 three d NAND conversions over the last few years, including the first half of twenty eighteen and are currently digesting these investments. Our recovery in investments 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 3 d 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 handlock 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' road map.
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 in our other product lines in recent quarters, epi and furnishes, 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. So let's now take a short look at our Q4 guidance as we communicated in our press release in our overnight press release.
So for Q4, on a currency comparable level, we expect sales of between €220,000,000 250,000,000 and an order intake between €250,000,000 €260,000,000 And yes, we added the comment that Q4 still reflects some uncertainty around the exact timing of individual tools. So 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 2 at a time, so that everybody has a chance to ask a question. All right, Anna, we are ready for the first
question. Thank
We will now take our first question from Peter Olofsen from Kepler Cheuvreux. Please go ahead.
Yes, good afternoon, gentlemen. Yes, 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 7 nanometer build out to the Q4 order intake? Or is that build out nearing its completion?
And 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? And then I have a follow-up, please.
Okay, Peter. Thanks for your question. So yes, pretty straightforward answers to your question. So first of all, will Foundry have 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, We do foresee memory yes, 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. And 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 so 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. Then a more strategic question. Some of your competitors can combine different competencies because they are active in deposition, but also in edge, clean and inspection. And 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?
Yes. We our growth strategy takes very well into account that we don't have we are not active, let's say, in core Edge. And it we don't see a limitation, let's say, in the next couple of years in any way for us to go.
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 is broad based. Could you also provide some indication of is this a sort of one off, but this is a temporary spike?
Do you expect to continue well into the next year? And what will be driving it? That's my first question. Thanks.
Yes, Nigel, first of all, we absolutely don't think this is an incidental thing. Will there be some cycles at 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. But 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.
So we see a pretty bright future in these segments in the coming years. And 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 tuneos to the needs of these markets. And specifically, yes, we've seen bookings significantly increase in the analog market Q on Q and in Q3. And our expectation is that, yes, at least in the short term, the strengths will stay. In the how it will develop in the course of 2019, that's, of course, too early to say.
But if you look in the short term, we have pretty good visibility on a solid climate there based on the feedback from our customers
segment.
Great. And then, Anit, on visibility also in the Foundry and Logic segment, I think logic is strong. Maybe we've seen a CapEx bump at a big IDM helping this quarter, maybe also the coming quarters. And 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? And also on foundry, you've seen reuse of equipment from 10 to 7 and now moving from 7 to 7 plus. Then you flagged obviously the investments of 5 nanometer picking up quite strongly. So how should we see that in terms of on the Foundry side, will that be enough to offset maybe reuse? And in Logic specifically, do you expect that spend to be maybe a bit more 1H weighted versus the rest of the year?
Or is that too early to call still?
Of course, our visibility is best for the first half of this moment in time. But looking at the full year, so far, logic in general for the market and in general is expected to be reasonably healthy, assuming that the 10 nanometer ramp will continue to get the focus that has developed that has been developed in advanced logic, let's say, in the course of this year. So under the assumption that 10 nanometer continues to get focused, then 2019 could be a very healthy year for Logic. For Foundry, yes, it's really determined by the spending plans for 5 nanometer. And yes, so far, the feedback from customer, the foundry customers, as I said, there's a very strong commitment to build initial capacity in the 5 nanometer node.
And 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. But the initial commitment to get the ramp going in 5 nanometers, we have seen to be the commitments we have recognized to be very, very strong. And that's what we are serving at this moment in time. And we view also there's 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. So we are very happy with the developments so far. And yes, 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.
That's appreciated. Thanks.
We will take our next question from Quang Le 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. So in Q4, I'm not sure how 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?
Yes. Let me answer that, Quangdi. What we have seen, we always have said that the gross margin will be in the low to mid-40s. So 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.
That is now those margins are now more or less on the normal levels. So we are back in that lowtomid40s 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 Q3 of our products was more at the lower side than on the upper side than what we have seen in previous quarters. And we would be disappointed a little bit when the margin in the 4th quarter would not be a little bit higher than what we have seen in the Q3.
So you expect Q4 to be higher and otherwise you'd 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 saw we received your outlook for 2018. But do you have any visibility beyond that?
Yes. Okay, okay. Yes. So not we gave some comment based on the former question on 'nineteen, but I assume you are looking at the market as a whole. Again, we have on 2018, we've been 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. Then we adjusted 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 20% -twenty percent 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 'nineteen downwards in a way less negative.
And now the common denominator is somewhere in the high single digits negative. So that's between 8% 10% negative or so for next year. And we at this moment in time with the visibility we have, we tend to concur with that projection. And then the assumption again that logic will stay reasonably healthy in 2019, again assuming that 10 100 meter ramp will get continued focus. Foundry expected to be up, driven by 5 nanometer.
DRAM to yes, to maybe year on year drop somewhat after 2 very, very strong years of strong spending. But still, although there is a year on year drop, still a decent contribution throughout the year on a quarterly basis. And then for NAND, we expect that the first half will still be weak of next year, in line with also somewhat weak second half of this year. And then 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.
We will take our next question from Robert Sanders from Iberia Bank. Please go ahead.
Yes. It's Deutsche Bank of Iberia Bank. So 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's where you have your highest market share in ALV and where you are the primary source to the 2 largest players, Does that have any effect on your mix and your gross margin as we look into 2019? And I have a follow-up.
No, Rob. The gross margin for we have no big differences in gross margins with the different customers that we have.
Okay. And got it. And just related to your commentary about 5 nanometer and 10 nanometer in the big logic sorry, go ahead.
The gross margin mix is more related to certain applications that we have. And that can differ per customer, of course, sort of applications that you have, but not in the customer as a whole.
Got it. And just one thing that struck me is that you say that your large foundry customers started 5 nanometer quite aggressively and 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 3 month lead time. So what explains a lot of people might look at these numbers and say this is very lumpy and it's not likely to repeat And this is kind of orders that are being pulled in. But 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 ranked scheduled, which is obviously 5 nanometer foundry in 2020 and the big IDM 10 nano next year?
Thanks.
Okay. So first to clarify because maybe we have not been completely clear on that. We did not state that foundry is aggressively ramping. We said that the investment levels of foundries in the course of the year shifted more to from 7 to 5, 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 'nineteen and preparing for a solid wafer start out high volume wafer starts out in 2020. So this is really an early start, but we are heavily engaged in that early start in the foundry space.
So that's what you are seeing now. And 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. So and we are not about the exact timing of our customers in ramping their wafers, but there 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. And then yes, you said if this is a onetime bump for us, I think you maybe you can read it a little differently.
As you very well know, that's 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 logicfoundry versus memory. So that is a very important data point that you have to take into account in looking at ASMI. And 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 going to new nodes. So in Foundry going to 5, in Logic going to 10, And that we, besides that, also are aggressively working on expanding our served available market, not only in ALD but also in the other product lines. And yes, 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 also that explains for a big part that as a result of that, our Q3 and potentially Q4 orders are strong contributors there, are logicfoundry and to a lesser extent, analog.
That's basically the story.
Great. Thanks 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. So 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, and then I have a follow-up.
Can you repeat one more time? Sorry. David, can you repeat one more time your first question?
Yes, 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 1 to 2 quarter kind of bump? Or do you see like 3 to 4 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?
Yes. That's very difficult to assess, David. We would love to give you a little bit more guidance on that. But the only thing we can say is that in Logic, this node was basically had an early announcement some time ago in 2016, 2016. And the customer really took time to prepare the ramp.
And now we really see a meaningful momentum developing like we have not seen any time before since they made that announcement in 'sixteen. But 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. And yes, and again, we saw already earlier on, we basically built the foundation for this ramp. This is not something the bookings development now is not something of today.
It's something we worked on over the last 3, 4 years to really increase our share of wallet in this node as soon which would become visible as soon as the customer would ramp. And that's basically what's happening now.
Okay, got it. Just to clarify, my question is more on the previous node. So looking back to 14 nanometer node, do all of those orders come in one quarter to 2 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 it, it has been spread out.
Okay. Got it. And then maybe a follow-up. When you look at the current so this current 10 nanometer advanced logic and compare that to 5 nanometer foundry, how would you compare them in terms of ALD intensity? Thanks.
So you are within foundry you said or?
Well, between the 5 nanometer foundry and what you see in advanced logic 10 nanometer, how would you kind of could you give us 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 intensity, the LD intensity has increased going from 16 to 10 in a significant way in terms of amount of layers. And the same is happening going from 7 to 5 at in the foundry space. And 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 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.
The first question is maybe a little bit of 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? And then also taking into account that you that there 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 ALU density that's also really a step up there?
What's relevant to us is both. So it's not that so if your question is our engagement in terms of ALD layers going down, going from 7% to 5% as a result of EUV, And we have to compensate that with wafer starts, and the answer is no.
Okay. Okay. And then the other question is on the evaluation tools. What does that mean for going forward? Is that it doesn't 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 a lot of new products when we introduce new products in the field and for a period of time, mostly for 6 to 12 months, replace so called eval tool with the customer. Then he can align his processes with our tool. And when that works out well, then he buys that tool. And afterwards, he will buy equipment in high volume manufacturing. So we have seen this year, you see that also on the balance sheet, how that was developing.
I mean, you saw that we have more nearly €20,000,000 more of eval tools on this moment outstanding as our customers. And that's representing the volume of new activities that we have started up in the past period, where especially for complete new tools, for new applications, we deliver those sort of easy tools. So 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 and is also the basis of the further guidance that we have given for the 4th quarter.
Okay. And then maybe as a final question, with yes, we see the weakness in 3 d NAND. But given the fact that you're still trying to get more applications in 3 d 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 3 d NAND revenues?
So your question, if we can grow our NAND revenue regardless of the climate in the NAND space. Yes, given your question
fact that you didn't have all the applications in the context.
Yes, yes. Okay. I understand your question. That makes sense to your question indeed. But yes, we again, the opportunities we are focused on to expand the number of applications in NAND are in, let's say, the more advanced stacks.
And the investments in the advanced stacks are low at this moment in time. So that is so in that respect, we are also depending for debt expansion on our customers reengaging on in their commitment on ramping the newer nodes.
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 it could become a little bit more significant for the top line of HMI. Could you maybe give some more color of what percentage 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.
Yes. It'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 going from Q2 to Q3, but we're not going to give percentages. And as we guided towards the number 3 segment behind the Logic and Foundry in Q3 in terms of bookings, let's say, above the memory in Q3. So that should give you some color also.
Okay. And then maybe on the working capital also going forward, so especially inventories at a high step up to €185,000,000 Q3. Can you give us some color on how that could develop the ramp that you are currently seeing in Q4 and maybe Q1?
Yes. And the working capital 185,000,000,000 inventories, indeed, in our view, too high, Edwin. So let's mention that also. There are a few elements in it, which I think are important in this mode. 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 and principle for the throughput time and the volume of orders that we have. That looks very healthy. That's also there's no issue with the inventories in that area. And when you look to our spares, then you see that gradually increasing. And 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.
So that's also developing in a We We have seen some finished goods on this moment increasing in the past especially in the 3rd quarter, But that's normally that's very stable and a very low level because, in principle, we do not have much finished goods. That's more a short time issue. Customer decides not to get the orders of the equipment delivered at the end of that quarter, but early in the next quarter. So that's also something which we'll be phasing out rather quickly. That had an impact of approximately €10,000,000 on inventories in the Q3.
And the most important one is the raw materials. And the raw materials are in principle a function of the activities that you're going to do. And here are the issues that we have on this moment. On the one hand, of course, we need more raw materials at the beginning of the quarter at the end of the quarter for the start of the new quarter. And then you can imagine that we give a guidance, which is substantially above the level before, that we need more raw materials, so that's a healthy part.
But on the other hand, we have been confronted in the past periods 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. And now that 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's caused to a certain overstock situation at the end of this quarter. And 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.
And is it also, let's say, €5,000,000 to €10,000,000 or
That is more than EUR 5,000,000 to EUR 10,000,000.
Okay.
Okay. 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 comments saying non memory is well over half of the revenue in this year and recent years. That's over the entire products portfolio, right? I mean, if we look specifically to ALD, that could be the other way around.
Is that correct?
That's all products.
Yes. Okay. Clear. And then on R and D capitalization and amortization, still quite high level of capitalization in the quarter. I think if 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? So is it going to be higher amortization, lower capitalization? Or is there a factor canceling the 2 up?
I expect that capitalization will be slightly higher than what we have seen in the past. So I don't expect that 2018 that, that will of 2019 will show a level what we have seen before in 2017. But I do not expect 2019, the capitalization, to be as high as it was in 2018. Hence, it's very strongly dependent on some of the development projects that we have. Then they exactly finalize because what I explained in previous calls is that the more that you reach the end level of a development project and then that looks rather successful, then according to IFRS, we have to capitalize and then we are also capitalizing that.
And we have seen those impacts, in principle, peaking in the 2nd quarter. We saw a small reduction in the 3rd quarter. I expect in the 4th quarter that it's that the capitalization will not be higher than what we have seen in the 3rd quarter. Will it be much slower? That is, I think, too early to judge from this one.
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. Yes, I had a follow-up on epitaxy in Foundry, where you had a breakthrough, I think, in 2017 at the 7 nanometer. With the foundry customer to go to 5 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
But 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?
Yes. We really intend to gradually really strengthen our position in mainstream CMOS in the, let's say, in the industry, logic, foundry, memory. And we see indeed the shift from 7 to 5 as an opportunity to make a step there also. And we will we trust we will see the results on that in EpiFoundry also in 2019.
Okay. And the progress so far, is it still
this And of course, you cannot compare it with ALD because ALD, of course, has a much broader application space in number of layers. But we do expect to expand our engagements. So the answer there is yes.
And 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 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. And we're working very hard to see also get, let's say, broader traction in 2019, 2020 beyond this engagement. But it's just too early to claim victory there, Peter. But it's a very relevant question. And it also your question also ties fits completely with our ambition and with the Epi strategy that we set out as a company a few years ago.
Okay. That's helpful. 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. So thank you, everybody, for attending the call today. On this day, I understood, with a few other conference calls. So thank you that you still were all able to make it.
And 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 is weekend schedule. Thanks again, and have a very good day.