ASMI issued its 2017 Q2 results last evening. For those of you who have not seen the press release, along with our latest investor presentation, it's 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. These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such statements. For more information on the risk factors that could affect results, please refer to the company's press releases, reports and financial statements, which are available on our website.
And with that, I will now turn the call over to Cecco Prada, President and CEO.
Okay. Welcome, everybody, to the call today. So let's now review our 2nd quarter conference call. 2nd quarter 2017 financial results, sorry, I was still structuring my pages. Net sales in the second quarter amounted to €202,000,000 a strong increase of 40% compared to the Q1 and up 46% compared to the Q2 of 2016.
Sales in the quarter were slightly above the top end of our guidance, which was a range of €180,000,000 to €200,000,000 In terms of product lines, although all product lines showed higher sales, our ALD business was again the key driver. By industry segment, revenue in the quarter was led by memory followed by foundry. Within memory, sales were predominantly related to 3 d NAND. We recorded a gross margin of 43.7% in the 2nd quarter, relatively steady compared to the 43.5% in the 1st quarter and 43.8% in the 2nd quarter last year. Note that we expect the gross margin to show more fluctuation during 2017 compared to what we have seen in 2016, but still was in the range of a low to mid-40s percentage as earlier indicated.
This is caused by new product introductions and related initial costs in this year. SG and A expenses increased by 9% compared to the Q1 and were up 20% year on year. This increase is partly due to the higher activity level and partly due to strengthening of the organization. R and D expenses increased by 2% compared to the Q1 and by 14% year on year. We generated operating income of €38,000,000 in the quarter with an operating margin of 19%, up from 10% in the 1st quarter and 12% in the Q2 of last year.
Financing result in the second quarter was €11,000,000 negative €11,000,000 negative due to a currency translation loss of a similar size. In the Q1, financing results included a translation loss of EUR 7,000,000 and in the second quarter last year, a translation gain of €8,000,000 Our net earnings increased from 36 €1,000,000 to €130,000,000 in the 2nd quarter and included a profit of €84,000,000 related to the sale of a 5% stake in ASMPT. Excluding the profit on the 5% sale and the PPA amortization, normalized net earnings amounted to €56,000,000 in the 2nd quarter, up from €42,000,000 in both the 1st quarter and the year ago period. Let's now take a closer look at ASMPT. In the first place, during the quarter, we reduced our stake in ASMPT from 39% to 34%.
And on April 24, we announced that we sold 20,000,000 shares or a stake of approximately 5% through an accelerated book build with gross proceeds of approximately €245,000,000 Following the 13% stake sale in 2013, we have continued to regularly review our shareholding in ASMPT with a focus on long term value creation. The most recent strategic review led to the conclusion last April that a further reduction of our shareholding of approximately 5% was justified. At the same time, our view remains unchanged that a significant stake in ASMPT is of strategic value at this stage of the company. In terms of operating results, ASMPT delivered another strong performance in the 2nd quarter. The Q1 results related to Asian PT of €34,000,000 included a one off gain of €10,000,000 Excluding this one off, results from investments increased from €24,000,000 in Q1 to €31,000,000 in Q2, despite the dilution of our stake during the quarter.
Results from investment excluding the ongoing PPA amortization charge, which was €7,000,000 in the 2nd quarter and is expected to amount €24,000,000 for the full year 2017, assuming constant currencies. On a 100% basis and excluding one offs, ASMPT's net earnings increased strongly by 38% to €88,000,000 in the second quarter in €88,000,000 in the second quarter. In the second quarter, ASMPT sales rose to USD 569,000,000 up 17% from the Q1 and up 20% from the Q2 of last year. Sales in back end equipment increased 22% year on year, while SMT Solutions increased by 19%. SMT reported bookings of US661 $1,000,000 for the 2nd quarter, an increase of 9% compared to the Q1 and exceeding the forecast for stable quarter on quarter development.
ASMPT's gross margin improved to 41% in the 2nd quarter with gross profit for the first half at a new record high. So let's now turn back to ASMI's consolidated operations. Our order intake in the 2nd quarter remained at a solid level of €206,000,000 up slightly from €204,000,000 in the Q1 and up 29% from the level a year ago. Orders came in at the high end of our earlier guidance of between €190,000,000 210,000,000 The backlog remained at a solid level of €210,000,000 which is 4% lower than the level at the end of March due to currency movements, but up 20% compared to June of last year. Orders in the second quarter were primarily driven by our ALD business, but also included a decent and increased contribution from Epi.
Moreover, we also received several orders for PCB. Looking at the breakdown in bookings by industry segment, foundry was the largest segment followed by memory. The foundry orders increased versus Q1 and were booked with multiple customers. This segment was driven by the continued ramp of 10 nanometer as well as 37 nanometer related demand. Next to ALD, foundry orders also included multiple Epi2 orders.
Within memory, bookings for 3 d NAND again accounted for the largest part, while DRAM bookings remained at relatively low levels. So let's now look at our balance sheet and cash flow. At the end of June, the cash position stood at €523,000,000 up from €379,000,000 at the end of March. This increase was the balance of, on one hand, the proceeds of the partial ASMPT stake and dividend received from ASMPT of, in total, €264,000,000 And on the other hand, a negative operating free cash flow of €41,000,000 during the quarter and cash spent on share repurchases and a paid dividend of, in total, €82,000,000 Net working capital increased from €139,000,000 at the end of March to €176,000,000 at the end of the Q2. The number of days of working capital measured against quarterly sales decreased from 86 at the end of the Q1 to 78 at the end of June.
Working capital on a currency comparable basis increased with approximately €50,000,000 which is mainly caused by a €54,000,000 accounts receivable increase due to the back end loaded nature of sales in the second quarter. Partly offset by improved the increase in working capital led to a negative free cash flow of €41,000,000 during the 2nd quarter compared to €20,000,000 positive during the Q1. We paid €42,000,000 in dividends during the quarter. In the Q2, we also spent EUR 40,000,000 to repurchase close to 800,000 of our own shares. This is part of the buyback program that we announced October last year and that we increased to €100,000,000 last March.
As of last week, we completed approximately 85% of that buyback program. As already earlier indicated, we intend to use the proceeds of the partial sale of the ASMPT stake of approximately €245,000,000 for a new share buyback program. This program will start as soon as the current program has been completed. Our commitment to use excess cash for the benefit of shareholders remains unchanged. We earlier announced the cancellation of 1,500,000 of our treasury shares, which has been approved by the Annual Shareholder Meeting last May and will become effective by the end of this month.
Let's now look more closely at the ALD market dynamics. Moore's Law remains a key driver for our customers as they are developing and introducing differentiated semiconductor devices at lower costs that are crucial enablers of new end market applications such as artificial intelligence, automotive and IoT. As our customers transition to smaller geometries, new materials and complex device architectures, we expect that more and more deposition steps will require the precision and control such as film conformality at low temperatures offered by single wafer ALD. At our recent Analyst and Investor Technology seminar during the SEMICON West Conference, we highlighted several One new application in 3 d NAND is an ALD silicon oxide sidewall protection layer, which is deposited prior to the another application in 3 d NAND is an ALD silicon oxide layer used to fill the select gate slit. Both applications are in high volume manufacturing today.
We remain confident that the ALD market will grow to reach a size of approximately US1.5 billion dollars by 2020-twenty 1 as the number of ALD applications continues to increase. Based on our customer relationships that have strengthened substantially in recent years and our broad portfolio of ALD solutions and our continued focus on innovation, we believe ASM is in a good position to benefit from these long term trends. In terms of industry segments of the LD market, the outlook for the logicfoundry segment continues to be healthy. The transition to 10 nanometer already fueled a significant increase in the number of ALD applications. And with 7 nanometer, we foresee a further increase in our addressable market.
We expect logicfoundry to remain the largest segment within the single wafer ALD market this year. Looking at 3 d NAND, the last few quarters marked the first meaningful deployment of single wafer LD for multiple applications in high volume manufacturing. After we recorded in the Q1 the 1st double digit percentage sales contribution from 3 d NAND, we have seen a further increase in the Q2 in 3 d NAND sales, both in absolute terms and as a percentage of our total sales. The strength in 3 d NAND that we have seen in recent periods is driven by the continued HVM ramp of the customers that we won last year. We continue to project a strong year on year increase in the 3 d NAND single wafer ALD market
for 2017.
Longer term, we also expect 3 d NAND to be a strong driver behind the overall single wafer ALD market. With the transition to 96 layers and above, we expect ALD will be required for additional process steps to address the increasing complexity and high aspect ratios of these new generation devices. In DRAM, while overall investments in this segment are recovering, demand for new ALD tools has not yet picked up in a meaningful way. DRAM customers are still mostly focused on technology transition within existing fabs. Looking at ALD tools for multiple patterning specifically, we noticed that customers are still largely addressing their needs by reusing existing tools, which negatively affects demand for new tools.
For the full year 2017, we do not expect multiple patterning in DRAM to be a meaningful driver of the single wafer ALD market. Next to ALD, we expect our epitaxy product line to have a meaningful contribution to ASM's overall top line this year. Earlier this month, also in connection with Semicon West, we officially launched our new Intrepid ES tool. The benefit of this tool include, amongst others, substantially improved temperature control capabilities and a more efficient reactor clean cycle. As a consequence, the Intrepid ES offers both enhanced performance and cost of ownership reductions.
With this tool, we target advanced applications in logicfoundry and also in the memory market. With the Intrepid ES, we believe we have substantially increased our addressable market in epitaxy. With our Q1 results last April, we announced that we won a 1st process tool of record selection for the Intrepid ES for an advanced epi application at the leading foundry. And then we booked the 1st high volume manufacturing order intake. In the Q2, we booked multiple orders as part of this selection.
So looking at the let's now look at the broader market environment. In their most recent updates, market researchers like Gartner and VNSI Research increased their forecast for wafer fab equipment in 2017 to approximately 17%, 18% positive year on year compared to 8% to 9% positive earlier this year. The reasons for the strengthening of the forecast are continued strong spending for logicfoundry and 3 d NAND and an increased spending for DRAM following the low investment level in DRAM in 2016. So let's now look at our guidance, the company guidance as included in our overnight press release. So for Q3, we expect a sales level of between €170,000,000 €190,000,000 on a currency comparable level, while for the second half of twenty seventeen as a whole, we expect the sales level higher than in the first half of this year.
And after the very strong quarters in the past two quarters, we expect order intake in Q3 at a still healthy level of €150,000,000 to €170,000,000 also on a currency comparable level. So at this point, we are more than happy Peter van Molmar, our CFO and myself to take 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, Liza, we are ready for the first question.
Thank We will now take the first question from Peter Olofsen from Kepler Cheuvreux. Please go ahead.
Good afternoon, gentlemen. Yes, just wanted to clarify the comment on Epi, where you talk about several orders. So these are several orders, but still from the same customer that you highlighted in Q1. So that means we have yet to see a broadening of the customer base. Is that basically what you're saying?
That's correct. Okay. Short answer, Peter, but that's correct.
Okay. And then in terms of broadening of the customer base, apart from logicfoundry, I think you're also mentioning opportunities in memory. What kind of horizon should we think of in terms of epi gaining traction in memory? 2018, 2019?
Yes. Okay. So yes, to just repeat the bigger picture, it was a great opportunity for us, 1st of all, to remind that for the audience refresh it for the audience that we that this penetration really opened up for us the happy market beyond, let's say, the 100 $1,000,000 market that we had been so focused on so far, which was the analog power part of the market. And the total addressable market in Epi is around 6 So we invested for the Epi market in the coming years. So we invested for the last couple of years in several areas in the Epi space and of which this foundry area was just 1.
And we really indeed have now a first victory in that area with multiple orders. And we continue to seeding in other areas, which includes indeed a memory the memory space. It's just too early to claim any victory. Again, we have been working in those areas for a significant amount of time. So basically, for the last 2 years, we have been investing in that area internally and in cooperation with customers.
It's just too early to claim victory, but we target to see results there, let's say, within the next 12 months. That's what we are targeting. Okay.
And then yes, and in memory, you're addressing both DRAM and 3 d NAND?
Yes. One area is maybe yes, yes. We are targeting both areas, and certain applications are more, let's say, shorter term than other applications, but we include we focus on the whole memory space, yes.
Okay. Then my second question, I think for Peter, relates to the CapEx, which was a bit higher in Q2 than what we have seen in previous quarters. Is that just some quarterly volatility in there? Or is it kind of indication that we are going to see higher levels there going forward? And related to that, can you confirm that given your outsourcing model, you are able to grow volumes in a meaningful way without major CapEx need?
Yes. A few remarks there. Indeed, there is not never a straight CapEx amount per quarter. We are improving and increasing our R and D facilities in the forthcoming period. So hence, it's likely that our R and D of our CapEx will be a little bit higher than what we have seen in the past in the next 3 to 4 quarters.
But all in all, in general, that remains the same. So it's more related to the R and D area than to manufacturing. And given our outsourced model, we think that we can deliver the requirements that the customers are asking for.
Okay. Thank you.
You're welcome.
Thank you. We will now take the next question from Robert Sanders from Deutsche Bank. Please go ahead.
Yes. Hi, good afternoon. Maybe a first question on EUV. Given that ASML is now saying that EUV will be used up for up to 14 layers, what does that do to your self aligned opportunity given that patterning is a big part of ALD? And I have a couple of follow ups.
Okay. Yes. So well, yes. So on the EUV, in general, we expect patterning to let's say, patterning deposition related deposition related patterning to remain a solid part of our business and of the single wafer ALD market in the coming years. Even with the introduction of EUV at 7 and 5 nanometer, Yes, pathogenic complexity overall continues to increase and will offer is our belief, besides the opportunities for, let's say, the EOB litho vendor, opportunities for the deposition players in a search for the single wave rail market.
Secondly, EUV patterning also, yes, requires more complex film stacks, yes, in order to overcome certain, yes, limitations or challenges that EUV introduction brings. And that may also open up additional opportunities for in the ALD space and as such for us. So that's how we view it in general. And besides that, Rob, we would like also to emphasize that, yes, patterning, as we said, stays, well, a solid contributor to the market. But versus 2015, the percentage contribution to single wave ALD market has gone down in 2016 and is believed to further decline in 2017.
So in that way, let's say, the dependency on that part of the market has gone down compared to, let's say, 2 years ago.
Got it. And just on the largest three d NAND player, you've obviously had success with 2 of the largest, the top 5. But one of the big hopes was that you would get in to the largest 3 d NAND player for next year. It does look like they've now allocated vendors for that. They've done the plan of record.
Certainly, your peers are talking about having already been selected. So what are you thinking there about your penetration into that large account into 2018, especially given that Tel is saying that their own ALD revenue is growing and actually doubling year on year with their semi batch tool?
Yes, yes, yes, yes. Yes. We're not allowed, of course, to talk about very specific customers. But in general, we can say that we still target count on expanding our presence in terms of number of customers in 3 d NAND as the industry goes to, let's say, 96 stack. So that, let's say, schedule that those objectives have not changed.
And we think that the seeding efforts on that are ongoing in several areas. And we think that real HVM materialization will come in the course of 2018. And maybe some initial visibility will come in towards the end of this year, but real material impact will be in the course of 2018 in our P and L.
Got it. Just lastly on the Q4 guidance, the implied Q4 guidance is quite vague in the sense that you talk about growth half on half. But I mean frankly that could mean a wide range of numbers for the 4th quarter. It could be $170,000,000 $180,000 $190,000,000 $200,000 So can you just be a bit more specific about what kind of growth you're expecting half on half in the second half of 'seventeen?
Yes, yes. So of course, our formal guidance does not include Q4 because we normally only look 1 quarter out. But as you know, there's no straight line in this industry when it comes to order intake on a quarterly basis. And we just had 2, 3 quarters of very strong bookings. So apart from the fact that we cannot comment specifically on the Q4 bookings level, we can say something about, let's say, the top line for the remainder of the year.
As we included in our guidance, we expect the second half sales level to be higher than the first half. And if there would only be a minimal difference of €1,000,000 or €2,000,000 then we would not have included it in the guidance. That's 1. And then secondly, we do expect to outgrow the WFE market based on, let's say, looking at the current forecast for the WFE market in 2017, if you if we look at our top line projections for this year.
Got it. Thank you.
Okay. You're welcome.
Thank you. We will now take the next question from Jim Fontanelli from Arista. Please go ahead.
Thank you. Good afternoon. So you kind of alluded to part of my first question on your last answer, which is just how you expect SME's top line to look relative to wider WFE spend over the next couple of years? You're talking about outgrowing it this year, but I guess even assuming a $190,000,000 or $200,000,000 number for the Q4, you'll be outgrowing it maybe by a couple of points this year. And it will be interesting to hear your perspective on the degree of outperformance you might expect from SMI or ALD versus wide WFE into 2018 2019?
So that would be my first question.
Yes. Jim, that's a clear question, understandable question because 2016, of course, we underperformed the market. In 20 17, you clearly see, 1st of all, that the single wafer LD market is expected to show a clear improvement after decline in 2016, which offered us it's one dimension along which we can show a better performance this year. But if you look at longer term, I think over a longer period of time because I think your question is related to that, on average, we are of the opinion that in the coming years, the single wafer LOD CAGR is expected to outgrow the WFE market. On average, let's say, over a 5 year period of time, that the potential of the single wave ALD market is really there as we also alluded to further in our introduction.
So that's one area along which the company has potential to grow. 2nd pillar is that we're also working hard and have been investing in technology and customer relationships over the last few years to grow our served available market in the total addressable market for ALD in the coming years. So that's another pillar along which we view that we have potential to grow. And then thirdly, which first evidence is there maybe on a somewhat smaller scale, but already in this year, is that we intend to grow in our other products like epi and PCV. By expanding also our served available markets, basically through focusing more on those products, we further expand our served available market in deposition.
So not only in ALD, but also outside ALD in other areas, where we so far have had more of a niche strategy. And that will go gradually. But every gradually increase immediately could have a meaningful impact to the top line of this company.
Okay. That's clear. And I guess that your point around the second pillar, which was increasing the TAM within ALD, that would imply some sort of market share relationship, right? I mean you're effectively implying the potential to take back market share by addressing an increasing number of applications within ALD. Is that the sort of corollary of what you were talking about with your 2nd pillar?
Yes, yes. It's if you look at we have, of course, if you look at the increased share of wallet going for in logic, logicfoundry, for example, going from 16, 14 to 10, basically, we have increased our served available market in logicfoundry there, basically. And we are aiming to further increase our served available market also beyond, let's say, the current nodes, not only in logicfoundry but also in the memory space. For example, what we are developing now in 3 d NAND is basically increasing our served available market on ALD. And the same, we intend also to look in DRAM, what over time we can do beyond, let's say, the patterning space that we are engaged in at this moment in time.
Will that have an impact immediately, short term on our P and L? No. But it will gradually become visible in our P and L. That's what we are working towards.
Okay. That's clear. And I guess secondly, maybe on a sort of shorter term thought process, but obviously you talked about the strategic review of the SMPT stake and the incremental 5% stake sale. But given PT's stock move overnight and obviously the reflection through to the SMI share price this morning, how you view the ongoing PT stake given that you're clearly showing improving operational performance within SMI. You talked about the opportunities lying in front of you, not just for ALD, but for the rest of the business.
And yet, the day after you report numbers, your stock price is dominated by what's happening with PT in the back end. How are you thinking about that sort of the strategic review option against that backdrop?
Yes. Well, it would not be good if our strategic reviews would be led by market stock price movements in a 24 hour time space. That's not how we run our company. And so if you look at a little bit more detail to the PT results, and we think PT, again delivered a strong quarter. If you look at the bookings after the strong Q1 order intake, they improved with another 9% to US661 $1,000,000 in bookings against USD561 1,000,000 in billings.
So that means a book to bill of 1.2 at the current billing levels with expectations for further growth in Q3. And just to name take one other indicator, gross margins, they are now at 41% level, while adjusted net income improved to 17% of sales.
So
if you look through the emotions of the day and look at the numbers, the results of PT in a little bit more detail, then maybe people will over time come to a different opinion. But that's at least our view. And Peter, you want to add something to that? I think
when you look to the PT performance, and you all can have read that, but also their bookings increased in the first half of this year as compared to the second half of last year with 40 percent. When you look to the billings, what Chuck already mentioned, we saw also an improvement quarter on quarter of 17%. Gradually, their gross margin is improving. And that's a function of all the things that have happened in the past period. And so the underlying quality of the results are improving further and further while they have a strong position in most of the segments that they are playing.
So I think that is the long term view. That should be substantiated also in our view about the performance of PT.
Great. Thank you. That's very clear. And maybe just very quickly, one clarification. Chuck, did you say that you were expecting to ship ALD units into the 96 layer HVM ramp next year?
Did I hear that right?
Yes. Just before I answer that, Jim, I just wanted to clarify that the way I answered your earlier question on ALD, I and I tried to provide a little bit more color to the audience on the, let's say, the overall growth potential of the company. I was not talking specifically to ALD market share. That's as long as you really understood my answer well in that context. So then secondly, the 96 stack, indeed, we are targeting to participate in the 96 stack of beyond the current customer base that we have HVM business with at this moment in time for 3 d NAND, let's say, as of, let's say, in the course of next year, probably by mid next year.
So it depends a little bit on the timing of the customers who what timing they use to ramp their fab for that.
Okay. So you'll start shipping units in at some point in the second half of next year to 'nineteen?
That's what we are again, that's what we are focused on. We are again, they have not made their final decisions yet to bring R and D partners to really freeze their processes for the areas that we are engaged on, but that could happen in, let's say, this we do expect that they will start to do that in the second half of this year. So we have no final yes yet. But if you look at the level of engagement, then we trust that we are on the right track.
Great. Thank you.
Yes. You're welcome.
Thank you. We will now take the next question from Mark Hesselink from ABN AMRO. Please go ahead.
Yes. Thank you. First question is on the order guidance for next quarter, slightly at the lower level. Obviously, 2 very strong quarters in the first half. So what is that slightly lower level?
What's driving that? Is that simply digestion of the orders that we've seen in the first half of the year? Or is it also that in logicfoundry you've passed a little bit the peak of this cycle?
You're talking about bookings in general?
Yes, yes.
Yes. I think the way you really should view is that in this industry, and you know this industry well, again, like I said earlier, there's no straight line in terms of order intake every quarter. And we really had 2 around 200,000,000 quarters, Q1, Q2. Also, Q4 was a strong quarter in terms of bookings. And yes, Q3 is not that good, but not as good as Q1, Q2.
We think it's still at a healthy level. But beyond Q3 and looking to, let's say, 2018 also, We believe that the company is well positioned, that the underlying trends as far as customers provide us visibility is healthy in the 3 d NAND space, in the foundry space, separate from maybe some timing differences, 1 or 2 months pulling in or pushing a few things out. But 3 d NAND, Foundry, healthy. Logic, spending pattern was maybe so far this year not as high as maybe a lot of players expected at the beginning of the year. Still to be seen how that will develop towards the end of the year going into next year.
But I think there only could be likely there's more upside there than downside in the logic space as we view it now. And then DRAM, there can, to us, only be upside because the contribution there has been, yes, relatively low so far as we also elaborated on in the introduction. So don't you should not read too much in the number in Q3 as if it's we don't view it to be as a long term trend. That's not the case at all at this moment.
Okay. That's clear. Thanks. And the second one is on DRAM. As I can remember correctly, you said always that they're reusing some machines and that's the reason why you don't see that there's no capacity being added there from your perspective.
Is that something that how long can it still continue? Is there a lot of room for them to reuse machines?
Or when do
you think that it that will end and that you see some strength coming into that DRAM space?
That's a great question. We would love if we know the answer. But like we said, overall investments in DRAM have been recovering to some extent across the board. But yes, if you look at specifically new ALD deposition tools for patterning, then the demand is still modest because of the fact that most of the demand is occurs in existing fabs. And yes, we are dealing with big memory customers that then find a way to reuse equipment from the DRAM or the NAND area.
And they and that's what they that has been providing them most of their additional capacity so far. And as a result of that, for the remainder of the year, we don't expect DRAM to be a meaningful driver for the single wafer ALD market. But yes, 2018, we don't know. It could change. And as I said earlier, based on Jim's question, we are ready for the patterning part of the DRAM market when it recovers.
We are ready to engage with competitive products in our view. And besides that, we are working hard also to look for ways to expand our served available market in the medium and long term in DRAM, in DRAM ALD beyond patterning and also outside ALD. So that's but that's some for somewhat medium and longer term. Mark, does that answer your question?
Yes, yes, it does. Thanks. Just one short one is on the OpEx. The SG and A was maybe or the cost there was burning a little bit higher than what consensus expected, therefore, a little bit less leverage on your additional revenues. Can you talk about what's driving that?
Is that preparation for the future or?
Yes. Let's put it a little bit in perspective, yes, because due to the higher sales, we had €6,000,000 more gross margin. And of that €26,000,000 we used approximately 3 less than €3,000,000 of OpEx. So that's about the leverage. But when you look to the cost increase, then in SG and A, approximately fact that we have a higher activity level.
So some costs are related to that activity level. And the other half is the strengthening further strengthening of the organization that we do in particular areas, especially to cope with opportunities that we see where that Chuck already was referring to.
Okay. Thanks.
Yes. Sure.
Thank you. We will now take the next question from Tammy Qiu from Berenberg. Please go ahead.
Hi, guys. Thanks for taking my question. So the first one is on the progress of 10 nanometer and 7 nanometer ramp. I remember you said that you have already seen early 7 nanometer demand. I'm just wondering is 10 nanometer build already done from your perspective, from equipment perspective?
And is 7 nanometer kind of still at early stage, there is more to come? And if there is more to come, what is the rough time line?
Yes. Tammy, that's we are engaged. We see orders so far in 2017 for both nodes, 10 and 7. In the course of the year, of course, the level of 7 nanometer business increases. Whether yes, the 10 nanometer really has stopped, I think that's too early to conclude.
That's not what our customers have told us. But I think the ratio will if you look at the ratio of 10.7%, then 7% will the ratio will shift more towards 7% towards the end of the year and going into next year. Yes, there is more to come definitely on going into 2018. And yes, we're now carefully listening and waiting for guidance, let's say, from the leading foundry customers on 7 on how soon we have to ramp for them. But yes, let's say we don't have visibility going into 2018 yet on that
Okay. So really 7 nanometer is a 18 story and 10 nanometer has to support the order level from foundries for this year?
Well, again, we have already businesses in this year for cement. So their initial pilot capacity is being built already this year. And what we do see is that there is pilot capacity invested in new applications, also applications beyond, let's say, the current 10 nanometer engagement. But how quickly they will ramp from, let's say, pilot volume levels to really full flash volumes, that's still to be seen. That's still to be seen from our customer and probably also their supply chain.
Okay. And the next question is about the demand level in foundry logic for 5 nanometer, I. E. Beyond 7 nanometer. When you can get confirmation and say, okay, you are selected for certain application?
I'm just trying to get a view about what are you doing and what is the progress for you to protect your market share in this market or maybe even gain back market share?
Yes. Well, for 5 nanometer, that's all going now. That's ongoing now. I think in the next, let's say, 12 months already, a lot of directions are being defined by customers, so on 5 nanometer. Certain we're now already talking about 5 nanometer engagements in having seeding systems at the customer to work on 5 nanometer.
That's ongoing as we speak. And that will likely only further develop in, let's say, the coming quarters. But it's ongoing now already.
Are you doing anything to protect your market share to make sure that you're not losing market share any further or maybe gain back market share?
Well, I think it's just we're focused on expanding our engagement. And yes, of course, it's working on M5 is also on protecting your existing engagements. It's always but it's both. It's we're working on both areas, yes, to expand into more applications and at the same time, make sure that we can provide continuity. And continuity can be from a cost point of view, but it can also be from a technology point of view.
It depends a little bit on the application.
Okay. I see. And last question. On Epi tools, do you have a forecast on the total addressable market for Epi similar to the one you have on ALD?
Are you asking for the size?
For the size, yes, I. E, what is the future addressable market for you?
For us, well, basically, we said that we were engaged in the 100, yes, a little around $100,000,000 addressable market, U. S. Dollars. And now we are identifying opportunities in the broader, let's say, US600 $1,000,000 market. Are we immediately engaged in all the applications that make up the $600,000,000 Of course not.
But we are developing our and strengthening our platform and our reactors in such a way that we are a viable alternative in many more areas of that $600,000,000 market.
That is the market size today or that's your forecast?
No, that's it. That's basically how Gartner estimates the market today. And the CAGR for Epi is for a number of years. It's depending on what firm you work with, but it's small double digit CAGR percentage that is forecasted for the Epi market. So a little more than 10%.
And that, of course, changes, and that's on average over a 5 year period of time. But it's definitely a growth area. It's perceived as that API's applications are going to grow in both logicfoundry and in the memory space in the coming years.
Thank you. We will now take the next question from Johannes Reiss from FS Capital. Please go ahead.
Yes, good afternoon. Only one last question, a follow-up to the latest we have on epitaxia and PECVD. You mentioned the market size. You mentioned that you gradually can grow in this space to different application and that could be meaningful for the company. Maybe in 2 years ahead or so could be the growth rate because you mentioned even that the Epi market is growing around 10% and you are maybe winning shares now and moving in new market segments.
Could this area be growing in the same way, LAT going forward? And how is the margin profile compared to ALD?
Yes. Johannes, thank you for your question. Yes, it's that's just too early to tell. The we now have the initial gains that we have an established strong competitor and that will also fight for their business. So we will gradually we schedule to plan to gradually build a position there.
And but we have a healthy ambition. And we also view like we introduced the tool at Semicon West, the Intrepid ES tool. And we presented there that we view the tool has some intrinsic capabilities that make it pretty competitive for a number of applications. And we're going to build on that. And it's to us to convince our customers that we are right with our view.
And yes, this market is now basically a one vendor market. And I think it would be a win win situation for the industry if we would be able to develop our position. But again, it's for us to prove and it's too early to share any projections. We just first want to do our homework And then step by step, we will share our results with the financial markets.
Yes. And Johannes, your question about the gross margin, is that in line with the other activities? There, the answer is, in time, we do not expect that the gross margins as well on the intrepidals, on PECVD will not be different from the average that we see in our organization. However, in the initial phase, you can imagine that we have more cost. When you introduce a complete new product, where you include so you have to go back to your supply chain.
So they have initially higher costs. The customer comes back to you and wants to have some additional things. And especially since it's all new products for us, the initial phase there, the margin is a little bit under pressure. And that's one of the reasons why we have given that guidance or so that we expect a little bit more volatility, especially in the 2017 area where we are bringing those first products into the market.
Okay. Clear answer. Thanks a lot.
Thank you, Jans.
Thank you. We will now take the next question from Charles from Nataxis. Please go ahead.
Yes, good morning. So I had a a question on CapEx. I think you mentioned this year it will be probably higher. But I wonder in terms of CapEx to sales, what are your expectations in the midterm basis? Thank you.
In the midterm basis, we expect that the CapEx will be slightly higher, so than what we have seen in the past. But on the longer term, we expect that it will be back again on the numbers that we have initially mentioned, that's €20,000,000 to €30,000,000 on an annual base. Again, it's a little bit dependent on the applications that we are bringing into the market, new applications that we bring into the market because that might lead to some additional own equipment that we have to put into our lab environment.
Okay, understood. Thank you.
You're welcome.
Thank you. We will now take the next question from Edouard de Jong from NIDC.
A few questions left. Maybe I've missed it a little bit on the gross margins for you, Peter, maybe going into Q3 and Q4, can you give us a little bit more color on the moving parts there?
The biggest moving part is, in principle, is the mix. And what we have indicated is that what I just answered on the question, Johannes, are honest, is that in principle, when we have complete new products, when you have ALD products, there we have already a lot of experience with. So they had impact initially on when you introduce new products on the gross margin is limited of scale. On the moment that you introduce complete new products like the Intrappit that we mentioned, like the inroads that we are making on this moment, the PECVD, Those products will have initially a lower margin because in the supply chain is not used to making this sort of products. We are in aligning those the details of the products with our customer base.
And as a consequence of that, you have initially higher cost. And we expect that, at this period of 2 to 3 quarters before such a product is going back into a more normal gross margin level.
So the level of gross margin that we've seen in Q2, that's maybe also a good guidance to see for Q3 and Q4?
What we have indicated is that we expect somewhat more volatility, and the margin indications that we always have given for low to mid-40s. Again, it depends highly highly very strongly on how much of those complete new products that you are delivering in a certain quarter.
Okay. I can imagine. Okay. And then on PECVD, so we were at Semiconductor West and it sounded quite exciting, the opportunity that you have there also in 3 d NAND. Do you maybe have a little bit of feeling for how big that market could be in PECVD?
Yes. Well, PCVD is a very big market in terms of size, but there are quite a few established players there, different from the Epi market. There are a few U. S. Companies.
There are a few Korean companies. So we have to carefully choose what customers and what applications we would like to engage on. And so we think our view is that there is room to improve, but it will go step by step.
Not in the way it went with Epi at the end.
Could you repeat that one more
time? Not at the space that it went with Epi. So Epi gained a lot of traction all of a sudden in a few quarters' time. And that's not the path that you would see for PECVD or
No. Well, I think we again, we are just focusing on a number of new applications with specific customers. And what you have seen now already that we have an engagement in PCVD in 3 d NAND, yes, so and which we did not have, let's say, last year. So but it's one application, one customer, So and we grow from there. So the only thing I want to say is that the market, PCV market is even is much bigger than the Epi market even, but also the number of players there is also bigger.
So we in both areas, we intend to grow gradually in a smart focused way. So it will not be a hockey stick effect. But the good thing is that every opportunity we have to grow there, the impact to our top line, given the size of this company, could be meaningful.
Thank you. We will now take the next question from David O'Connor from Exane. Please go ahead.
Great. Good afternoon, gentlemen. Thanks for taking my question. 2 from my side, if I may. Firstly, maybe on the ASM Pacific stake sale.
Chuck, can you give us some idea of how often you intend to redo that exercise? Is this more once every 3 year type exercise or something a bit more dynamic? And I have a follow-up on China. Thanks.
Well, the first one, we're not going to do one certainly based on today's stock price movement. Yes, that's the first remark because we are we just do this on a structural in a structural way. We review our strategic portfolio and our strategic direction of the company multiple times a year among management. And also regularly, we review it with our Board. And that's what we will continue to do.
And again, we did that, of course, on our way to we did it earlier in the year. We, again, did it on our way to the AGM because, of course, that subject was on the agenda of the AGM. But it's not that as a result of today that we immediately would have to revision our exercise of, let's say, 1 or 2 months ago. But all those elements are, of course, always taken into account in the regular strategic reviews that we will do in the future. And that's it.
But the strategic importance, the strategic strategic value of PT to ASMI as we expressed at the AGM, that position today has not changed.
Okay. And thank you for that. And as a follow-up on China, can you talk a bit about the opportunity in China among particularly the new domestic memory players? How are you developing the relationship with them? When do you expect some orders?
Are you seeding tools? Any color around that opportunity with the domestic memory players in China and timing will be helpful. Thanks.
Yes. Well, we a few short answers. The revenue in China this year, although, let's say, still at a low base compared to, let's say, the other regions in the world, is significantly higher than last year. We expect next year to significantly increase compared to this year. And the number of engagements, the number of, let's say, interactions with customers grow every month if we look at, let's say, how our activity level in China has developed over the last 6 months.
And as a result of that, we're basically also ahead of that because it's a little bit chicken and the egg. On the one hand, we decided to increase our to strengthen our infrastructure in China significantly. And that has resulted in more contacts, but also the intensity level has triggered us also to do that even more in actively. So in general, the activity level in China is increasing, but again, from a low base because historically, in China, a lot of investments were done in all our technology nodes, which did not fit well with our the majority of our product portfolio. But more and more, we are aligning our portfolio with the needs of the China market.
And that also, of course, what helps is that in time, they need more advanced technology.
We still have people in the queue, but we are running out of time. So we have to conclude the conference call. But for any remaining questions, please contact us after the earnings call.
Okay. Okay. So Victor, that means that we now conclude the call? Yes. Okay.
Before the operator concludes the call, sorry if any of your individual questions have not been answered by now. Also on behalf of Peter. Of course, feel free to contact us after this call with any remaining questions you may have through Victor. And so it remains me to say thank you very much for your interest today, and let's stay in touch.