Good day, and welcome to the ASM International Q3 twenty seventeen Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Victor Barrino, Director of Investor Relations. Please go ahead, sir.
Thank you, Sergei. ASMI issued its 2017 Q3 results last evening. For those of you who have not seen the press release, it, along with our latest investor presentation, is accessible on our website, asm.com. 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 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 will turn the call over to Chuck Del Prado, President and CEO.
Thank you, Victor, and thanks to everyone for attending our Q3 2017 results conference call and for your continuing interest in the company. After a review of operations, Peter van Wommel, our CFO, CFO, will join me, of course, in answering any questions that you may have. So let's start with a review of our Q3 financial results. Performance in the Q3 was in line with our expectations. Revenue in the quarter decreased by 8% compared to the 2nd quarter and increased by 28% from the Q3 of last year.
At the level of €185,000,000 3rd quarter revenue was at a level of $185,000,000 and the 3rd quarter revenue was towards the higher end of our forecasted range, which was between $170,000,000 and 190,000,000 euros Reported sales in the 3rd quarter were impacted by a 5% negative currency effect, both Q on Q and year on year. The revenue stream was led by our ALD business at some distance followed by Epi sales, which increased strongly compared to the previous quarter and included multiple tools of our new Intrepid epitaxy platform. Revenue in the 3rd quarter also included multiple PECVD tools related to the new application win that we announced with our 2nd quarter results. By industry segment, revenue was again led by foundry, followed by memory and then logic. Foundry remained at a strong level compared to the 2nd quarter and included an increasing portion of 7 nanometer related investments.
Within memory, sales were predominantly related to 3 d NAND investments, which continue to contribute a solid double digit percentage of our total equipment revenue. The gross margin decreased to 40% compared to 43.7% in the 2nd quarter and 44.2% in the Q3 of last year. As already flagged with our 2nd quarter results, gross margin in the 3rd quarter was negatively impacted by new product introductions and related initial costs. The impact on the gross margin of these newly introduced products amounted to 5 percentage points or €9,000,000 We expect that the gross margin will continue to be impacted by these initial costs in the next few quarters before normalizing again in the course of next year. Looking at the operating expenses.
SG and A increased by 3% from the 2nd quarter, while R and D decreased by 10%. The operating result amounted to €26,000,000 down from €38,000,000 in the 2nd quarter and up from €17,000,000 in the 3rd quarter of last year. The financing result in the 2nd quarter was the financing result in the 3rd quarter was €8,000,000 negative due to a currency translation loss of a similar size. Translation losses amounted to €11,000,000 in the 2nd quarter and €3,000,000 in the 3rd quarter last year. Our net earnings decreased to €42,000,000 in the 3rd quarter from 100 and €32,000,000 in the 2nd quarter.
As a reminder, net earnings in Q2, of course, included a profit of €84,000,000 related to the sale of a 5% stake in ASMPT in that quarter. On a normalized basis, excluding the profit on the stake sale and the PPA amortization, our net earnings amounted to €48,000,000 in the 3rd quarter compared to €56,000,000 in Q2 €40,000,000 in Q3 of last year. Let's now have a closer look at ASMPT. Results from investments, which reflect our share of approximately 34% in the net earnings from ASMPT, increased to €32,000,000 in Q3, up from €31,000,000 in Q2 €27,000,000 in the year ago period. These figures are on a normalized basis and exclude the book profit on the ASMPT stake sale and the ongoing amortization charge.
ASMPT had another solid quarter. Sales in Q3 increased to a quarterly record of US654 $1,000,000 up 16% from the 2nd quarter and up 22% from the Q3 last year. SMT solution, the surface mount technology solutions, in particular, had a strong quarter with a sales increase of 54% year on year. ASMPT reported bookings of US574 $1,000,000 for the 3rd quarter, a decrease of 13% compared to the 2nd quarter, but 32% higher than in the Q3 last year. For the 1st 9 months, ASMPT reported 24% growth in sales and a doubling in adjusted net profits.
Now turning back to ASMI Consolidated Operations. New orders of €160,000,000 in the 3rd quarter were within the range of between €150,000,000 170,000,000 that we had guided for. Orders decreased by 22% from the second quarter, but were up 31% compared to Q3 of last year. Orders were for the largest parts driven by our ALD business, but also included again multiple epi and pCBD tools. Bookings were led by memory, closely followed by Foundry and then Logic.
Within memory, 3 d NAND continued to account for the majority of the order intake, while DRAM remained at relatively low levels. So now turning to the balance sheet and cash flow. At the end of September, the cash position stood at €525,000,000 essentially unchanged compared to the end of June. We generated positive operating free cash flow of €20,000,000 during the quarter and received €18,000,000 in dividends from PT. We spent almost €33,000,000 euros on share repurchases during the quarter.
Net working capital decreased from €176,000,000 at the end of June to €163,000,000 as per the end of September. Outstanding days of working capital remained approximately stable at 79 days. At the end of August, we completed the €100,000,000 share buyback program that we announced in October of 2016. Under this program, we repurchased in total 2,000,000 shares at an average price of €50 per share. Furthermore, during the Q3, the earlier announced cancellation of 1,500,000 of our treasury shares became effective.
On September 22, we announced the start of a new €250,000,000 share buyback program. When we announced the 5% ASMPT stake sale last April of this year, we said that we would use the proceeds of approximately €245,000,000 for a new share buyback program. The share buyback authorization that was granted by the shareholder meeting in May runs until November 2018, but we strive to complete the full program well before that time. We intend to cancel the shares that we repurchase as part of this program. So far, as of October 27, we have completed 22% of this new program.
Our commitment to use excess cash for the benefit of our shareholders remains unchanged. So let's now look have a closer look at the trends that we see in our markets. 2017 is shaping up to be a very strong year for our industry. Total semiconductor industry sales are forecasted to increase by almost 20% this year, which compares to an average of 2% growth in the last 6 years. A key driver behind this semiconductor growth is the memory segment with strong volume and price increases in both NAND flash and DRAM.
VLSI and Gartner now expect equipment market growth in the high 20s, up from the high teens. That was still expected last year as a forecast for this year, with most of the growth driven by memory spending. For 2018, these market watchers expect a further low to mid single digit increase in WFE, in the wafer fab equipment, with again memory as the main growth driver. For the single wafer ALD market, we continue to see a clear improvement year on year in 2017. Looking at the different industry segments in more detail, we see that the logicfoundry part of the single wafer ALD market continues to be healthy this year and will probably remain stable compared to the strong level that we saw in 2016.
Following the success that we had in the logicfoundry segment last year, we expect that this segment to remain the largest segment for us in terms of sales contribution in the full year of 2017. Next to continued investments in 10 nanometer, we have seen the first early investments in 7 nanometer this year, which are likely to further increase into in next year in 2018. So we are seeing a further expansion of the single wafer ALD10, the total addressable total available market, in the transition from 10 to 7 nanometer in logicfoundry. In the next years, this sector continues to be a key contributor to the long term growth of the single wafer ALD market. 3 d NAND is clearly the key driver this year for the growth of the single wafer ALD market and also for the growth in our business.
Demand in the Q3 continues to be solid. From a lower base in 2016, the 3 d NAND single wave ALD is experiencing strong growth in 2017 and is this year for the first time expected to account for a meaningful double digit percentage of the single wafer ALD market. We expect a number of single wafer ALD applications in 3 d NAND to further increase with the next generation higher stack devices. In DRAM, while investments in the broader market have started to pick up, new tool demand for single wafer ALD patterning continued to be weak in the quarter, in line with our previous indications. Once customers start to invest in new fab capacity for DRAM, we expect tool demand for new ALD patterning to increase.
At the same time, we are very focused to over time expand our scope in the single wafer ALD DRAM market beyond applications in multiple patents. Momentum in our Epi business is increasing. As mentioned, Epi had an increased revenue contribution in the 3rd quarter and included multiple Intrepid epitaxy systems under the first customer win that we reported earlier in the year. These tools are part of leading edge foundry capacity being ramped in HVM by this customer. We continue to expect a strong increase in our total epi sales in 2017.
This first win has been strategic for us in expanding our addressable market in Epi. We remain focused on further building out our position in Epi market in the coming years. In short, in 2017, we expect to benefit from strong market conditions with a clear recovery in the ALD market and also a strong increased contribution from our Epi business. Looking at next year, we aim to outgrow the wafer fab equipment market. The long term outlook remains positive.
We continue to expect the signal wafer ALD market to grow to approximately US1.5 billion dollars by 20, 2021. And we believe our company remains well positioned to benefit from important technology inflections in the coming years. Now let's look at our Q4 guidance as we communicated in our press release. For Q4, on a currency comparable level, we expect sales of between €190,000,000 210,000,000 and an order intake between €170,000,000 190,000,000 So this is the end of our introduction. So at this point, we are more than happy to answer any questions that you may have.
All right, Sergey, we are ready for first question.
Thank Our first question comes from Peter Olofsen of Kepler Cheuvreux. Please go ahead.
Good afternoon, gentlemen. Two questions related to memory. Maybe first on 3 d NAND. You were somewhat late to the 3 d NAND game. So there was opportunity there to broaden your customer base and make some inroads there.
Could you maybe shed some light on the progress you're making there at the moment? And then my second question relates to DRAM. So the contribution to sales and orders in Q3 was fairly limited. Do you already see that changing into Q4? Or is the demand there still held back by the reuse of installed AOD machines?
Okay, Peter. Okay. Thank you. Okay. So first of all, yes, 3 d NAND.
Yes, I think we are pretty happy with the strengths of the 3 d NAND segment for our company in 2017. And we look at the contribution, it has contributed to more than one product line. It has contributed to both ALD and PCVD. So both product lines have benefited from our ramp, our ability to support the ramp of the key followers in this market segment in 2017. And yes, if you look at the ALD segment, then we currently if we look at the amount of applications that are out there in single wafer ALD for the 3 d NAND segment, our estimate is that we address a little bit more than 50% of the single wafer ALD addressable market now and that and we are very eager to increase that share of the addressable market in 3 d NAND going towards higher stacks.
And beyond that, as we shared with you before, so we're very focused in the for the leader in this industry to address their needs in 96 Stack. And for the followers, it's the notes that are applicable to them going into next year. So again, going into next year, we expect to further expand our business in 3 d NAND across multiple product lines and with more applications. And as we said before, we would like to expand the number of customers, especially as we are yet if we can close on the so far, let's say, successful R and D progress that we have made to qualify in qualifying for the 96 stack in this industry.
So just to clarify, have these selections for next year already be made, Mauricio?
No, no, no. They have not been made. I think towards the end of this year, early Q1 in Q1, I think those decisions will be finally made or will translate into, let's say, high volume purchase orders. But we can make an assessment we make our assessment based on how well, let's say, the R and D programs are going. And from that point of view, we can only say that we are on schedule.
But
no final decisions have been communicated by the customer, okay? So that's not specifically to us, but I think that's more generally their timing in freezing all their processes or most of their processes in preparation of the new node. So then on DRAM, your question on DRAM, is there any improvement expected for Q4? The short answer is no. We see some business activity in the P and L this year.
There is DRAM capacity expansion in there, but yes, not, let's say, with the momentum that we are used to from the past. So in that DRAM segment, we assess so our assessment has not changed compared to earlier calls that most investments or basically all of the investments so far from the big customers have been done in has been done in existing fabs. So that's mostly done through tech migration and migrating equipment from older nodes to newer nodes in existing fabs, a lot of reuse. And that has been especially applicable to patterning related applications. And so but the good thing is that we do see early indications now that going into 2018 that, yes, meaningful investments by customers may be done in new fabs, in the newly more recently built fabs.
And that would open up could open up more significant investments in patterning related applications in the by then relevant technology nodes. So we're preparing for that. That's one. And then secondly, we also have continued our investments in R and D for non patterning related applications in DRAM. We started those investments already, let's say, almost 2 years ago.
And we are working hard for that also to start to pay off, let's say, towards the second half of twenty eighteen and going into 2019. That's because those R and D valuations are ongoing now already for those final selections toward the end of next year. So that's another pillar that we are working on to really expand our penetration in the DRAM space with regards to ALD.
Okay. Thank you. Okay. You're welcome, Peter.
Our next question comes from Francois Neuet of Morgan Stanley. Please go ahead.
Thank you very much for taking the question. Actually, this epitaxy tool you're ramping up at a foundry guide, do you know for what type of market this is used? How big the opportunity could be with that customer by 2020, 2021? Or what is roughly the opportunity you think it could grow to just to compare with ALD and your EUR 1,500,000,000 market guidance? Thank you very much.
Yes, Francois, okay. Thank you for your questions. Thanks for being on the call. Yes, I think our assessment is that it is an application for at in that specific foundry segment for the N7 mainstream N7 node. Further details, even if we would know, we would absolutely not be allowed to share because that's customer confidential information that we would never share publicly with the market.
But it's a mainstream, as far as we know, a mainstream N7 mainstream CMOS N7 application. And of course, in N7, that's not there are more epi applications that are likely being used. So we are not the only supplier of Appy applications in that note. But it has been for us the first entrance in the mainstream eppily space. So it offers us a lot of opportunity to prove our capabilities.
And in that respect, Francois, we view it as an expansion basically of our served available market in the Epi market as a whole. If you look at the Epi market as a whole being, let's say, dollars 700,000,000 market. Until recently, we only engaged in the analog power part of the market, which was maybe up to €100,000,000 And this opens up the big other part of the market because the rest of the market, the biggest chunk of the market is
and
the biggest amount of money is spent in the mainstream CMO space. So that is our intention to get out of the $100,000,000 market or not to get out of it, but to expand our presence into the much bigger chunk. Yes? And yes, so our aim is to expand the number of customers and to expand the number of applications in the coming years. And of course, there's strong competition from the incumbent player.
But at the same time, I think the industry would benefit also could benefit also a lot from having an alternative in an epi market, which is a tough a market with a very tough technology and a very high entry barrier. So I trust that answers your question, Francois.
Thank you. Yes, go ahead please.
Yes, sorry. I was asking, so what is your unique selling point in that market if it is really competitive? Is it because you've got like a technology which is like a one generation ahead of the other? So is it just because you don't need as high a gross margin than your competitors?
I think it's a combination. Of course, I think the initial drive from the industry likely is to if there is a capable second supplier to bring in a second supplier, viable supplier, long term viable supplier in this industry. That likely there has been so far a big incentive for the industry to bring us in. But again, ultimately, you should ask our customers, not us. But that has opened up an opportunity for us.
But that as a starting point is a great opportunity for us to also, in working with customers, now getting the opportunity to work with them, to explore also where our tools could be differentiated compared to the existing tools. And personally, I don't think there's reason for us to exclude the possibility that we may have unique selling points in future applications, yes? But that is for us to prove in the near future. But if you would ask us is that a realistic opportunity, then the answer is yes. We're working hard on that.
But again, the jury is still out, but the team is very working hard to prove that in the coming years with multiple applications and across multiple customers.
Our next question comes from Jim Fontanelli of Arete. Please go ahead. Apologies. Our next question
expect to outgrow the industry in 2018. If I'm correct, I think you see 4 points to that. So it's the higher AOD intensity in the next logic foundry, you know, so the 7 nanometer. Now you're going to 3 d NAND 96 stacks that you're gaining market share there. Epitaxy and DRAM, a new application going into the second half of twenty eighteen.
Can you indicate what will be the biggest driver of your outperformance of the market?
Yes. I think it's a good question, Marc. It's maybe a little too early to since we're only in October, and you know this industry, a lot can change. But the color that we can provide on 2018 is that our current assumption is in making those statements on our, let's say, targeted performance in 2018 is a few fold. It's, first of all, we do expect that the logicfoundry market will stay healthy going into next year.
And of course, there likely will be a mix in spending from 10 nanometer to 7 nanometer. And so and we trust that going towards 7 nanometer that also our, let's say, level of penetration with ALD, with single wave ALD can grow going from 10 to 7 nanometer. So that's one element that we take into account. And of course, still what is still not completely clear is, again, the spending will shift towards 7 nanometer. And what still has to be assessed is how much reuse from 10 to 7 will be applicable in but we made certain assumptions there.
Then 3 d NAND is spending is expected across the board based on the visibility we have now from our customers is expected to remain strong. And as we spoke to earlier in the introduction, we expect the use of single wafer ALD to further increase going towards next level next device generations, such as 90 6 stacks for the leader and other advanced nodes for the followers. And yes, we expect those additional spendings for those new nodes to really to start kicking from, let's say, mid of the year, especially in the second half of the year. And we're also focused on increasing the number of customers in that industry segment. So then on DRAM, yes, we have assumed, like we also touched on earlier with Peter Holsens question, we do anticipate that the DRAM multiple patterning landscape, we assume that, that is going to improve going into in the course of 2018 based on real DRAM patterning spending in new fabs.
And then indeed, on top of that, towards the end of the year, we trust that also in investments initial investments into non patterning related DRAM applications will start to pay off. So and then on top of that, and last but certainly not least, for sure not least, we expect to the momentum in our new product business, epi and PECVD, to really contribute further into next year. We do expect the contribution of both product lines to increase in a meaningful way year on year in 'eighteen compared to 'seventeen. And last but not least, from a regional point of view, we also think China will start coming from a low base, but also we expect that to increase significantly. And it would not again, coming from a low base, but it would not surprise us if the revenue would double in that region next year.
So that I trust that provides you some color, Mark.
Yes, it does. The other question I have is on the more on the ALD market in general. So you have this €1,500,000,000 market target that is already from a little bit ago. It seems that the market has been a bit stronger the last quarters. And also we've seen that EUV is getting maybe better than people expected earlier.
Can you talk about the impact for your longer term market outlook?
So what you mean is what the impact could be specifically from EU EUV on a from a patterning point of view?
So it's actually 2 parts in the question. So one is the market in general seems to be stronger than when you provided that $1,500,000,000 target. And the second thing is what is the impact of a more successful EUV for that market target?
Okay. Yes. So well, as you know, in this industry,
okay,
2017 has been so far a very, very strong year. But our as a further provided evidence that the single wafer ALD market has a lot of potential, but it goes in waves. So our long term forecast has not changed. What we do think is that if you look at the time frame 2017 to 2021, that time frame of 4 years, that the single wafer ALD market has a good opportunity to outgrow the WFE markets during that time frame, yes? So we continue to believe that.
So that's on your question on the ALD market. On the EUV element, yes, we think it has 2 elements. One element is that patterning in general has since going from 2015 to 2016, the contribution of the patterning market to the single wafer ALD market has gone down significantly, not only in absolute terms, but also in percentage contribution to the single wafer ALD market. And going forward, we yes, at least for the next few years, we don't think the percentage contribution of patterning to the single wafer ALD market will change that much. So it will not come back to the percentage levels that it had in 2015.
So the single wafer ALD growth in the coming years, this year and in the coming years, more and more comes from or basically mostly comes from non patterning. So the market has become less dependent on patterning as we speak now. And in the past, it was mainly memory that drove it. At this moment in time, more patterning demand this year comes from logicfoundry than from memory. So that gives you some color on how that market changed.
So that's one element. The other element, so EUV, we are not as a result of that, not that concerned of EUV. EUV indeed will likely if it when it ultimately comes, it will replace some layers, some patterning layers, but as said, in a landscape that has changed according to as I just explained. And then secondly, the good the positive thing that EUV can bring is that it allows the industry to continue Moore's Law in an easier way. And that opens up when Moore's Law continues.
It likely will further increase the demand for deposition technologies that can accommodate the smaller geometries of continued Moore's Law. And that's where single wave ALD can bring the solution. So in that respect, I think it offers opportunities to this market, let's say, beyond a couple of years from now.
And our next question comes from Jim Fontanelli of
Yes. Hi, afternoon. Thank you. So just following up on your PCVD comments in the press release. Could you maybe give us an idea of how to think about sizing that opportunity, both for the second half of this year more particularly into 2018?
And just specifically, what are the new applications? I guess you're referring to TOS for 3 d NAND, but I just wanted to confirm that.
Well, again, PCVD for us will stay for the foreseeable future, we will say a niche player in that because the market has become by now close to a $3,000,000,000 market. But we are we're exploring how we can expand our position still within that niche strategy to cherry pick some good segments where we view that we have a differentiating position from a cost point of view or from a technology point of view and then grab those opportunities. And again, 3 d NAND is an example, is an important example where we explore our opportunities. And so it will not be changed into, let's say, a broad based across the board strategy, but a smart expanding niche strategy, where, as you know, let's say, small increases in market share in a $3,000,000,000 market can be meaningful increases to our top line given the size of this company at this moment in time. So that's what we are focused on.
And in that respect, we do expect that we do foresee that we have an opportunity in 2018 to year on year, in a meaningful way, grow the revenue in that product line.
And meaningful is what? It's double digit $1,000,000 incremental revenue? How do we think about that in more concrete terms?
Double digit $1,000,000 Yes.
Okay. And then maybe just to drop that down to epi. Could you give us an idea in the Q3, whether your new intrepid Epi business was into double digit 1,000,000? Or was that single digit 1,000,000 of revenue?
The total Epi business in Q3 was absolutely in the double digit dollar number.
But it's so incremental for Intrepid, so the new volume shipments Intrepid, you mentioned multiple
tools? The core I can give is that, let's say, until, let's say, recently, until early, let's say, this year, our mainstream business was the analog power business. And our position there, our competitive position is still the same as it was before. But now, let's say, over 2017, let's say,