Good day, ladies and gentlemen, and welcome to the ASM International first quarter 2017 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Chuck del Prado. Please go ahead, sir.
Well, it's actually Victor Bareño. Thank you, Alex. ASMI issued its 2017 first quarter 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 ASMI'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. With that, I will now turn the call over to Chuck del Prado, President and CEO. Thank you, Victor.
Thanks to everyone for attending our first quarter 2017 results conference call, and for your continuing interest in the company. After a review of operations, Peter van Bommel, our CFO, will join me in answering any questions that you may have. Let's now review our first quarter 2017 financial results. Net sales in the first quarter amounted to EUR 145 million, a slight increase of 1% compared to the same period last year, and a decrease of 16% compared to the fourth quarter. Sales in the quarter were at the top end of our guidance, which was a range of between EUR 135 and EUR 145 million. In terms of product lines, our ALD business continued to be the key factor. By customer segment, revenue in the quarter was led by Foundry, at some distance followed by Memory.
Within Memory, sales were predominantly related to 3D NAND, which contributed in a solid way following the increase in order intake in the last couple of quarters. The sales contribution of DRAM remained modest. We recorded a gross margin of 43.5% in the first quarter, slightly down from 43.9% in the first quarter of last year, and 44.9% in the fourth quarter of 2016. Variations in the gross margin are mainly explained by mix differences. SG&A expenses were stable compared to the fourth quarter and increased slightly by 2% compared to the first quarter of last year. R&D expenses increased by 2% compared to the fourth quarter and by 18% compared to the first quarter of last year. We generated operating income of EUR 15 million, down from EUR 30 million in the fourth quarter, and EUR 19 million in the first quarter of last year.
Financing result in the quarter was €7 million negative. This was caused by a currency translation loss of a similar size, which was mainly related to movements in the US dollar and the Japanese yen. In 2016, financing result included a translation gain of €19 million in the fourth quarter and a translation loss of €11 million in the first quarter. ASMPT delivered a strong performance in the first quarter. Results from investment, which reflects our 39% share of the net earnings of ASMPT, amounted to €35 million for the quarter, up from €18 million in the fourth quarter and up from €6 million in the first quarter of last year. These figures exclude the ongoing PPA amortization charge, which was €6 million in the first quarter.
Excluding a one-off non-cash gain of €25 million related to the adjustment of the liability component of the convertible bond, ASMPT's net earnings amounted to €64 million in the first quarter. This compares to €47 million in the fourth quarter and €16 million in the first quarter of 2016. In the first quarter, ASMPT sales rose to $485 million, a new record high for the first quarter, up 7% from the fourth quarter, and up 32% from the first quarter of last year. Sales growth was led by back-end equipment, which jumped 63% year-on-year, while SMT solutions increased by 10%. ASMPT reported bookings of $608 million for the first quarter, an increase of 29% compared to the fourth quarter, and an increase of 49% compared to the first quarter of last year.
Gross margin increased to 39.9%, up more than 200 basis points quarter-on-quarter, and up almost 700 basis points year-on-year. Now turning back to ASMI's consolidated operations. ASMI's net earnings on a normalized basis amounted to €42 million in the first quarter. Down from €69 million in the fourth quarter and up from €12 million in the year-ago period. Our order intake in the first quarter increased to a new record high of €204 million, up 15% from Q4 and up 25% from the level a year-ago. Orders exceeded our earlier guidance of €170 million-€190 million range. The order backlog increased from €157 million to €218 million, which also represents a new record for the company. Orders in the first quarter were mainly driven by our ALD business.
Looking at the breakdown in bookings by customer segment, memory was the largest segment for the first time in the last five quarters and was closely followed by foundry. In foundry, bookings decreased compared to the record level in Q4, but were still at a healthy level, supported by bookings from multiple customers. Memory bookings predominantly consisted of 3D NAND, which already picked up meaningfully in Q4 and further increased in Q1. DRAM bookings, although somewhat increasing compared to the fourth quarter, remained at a relatively modest level and were for a large part related to tech conversions. Looking at our balance sheet and cash flow. At the end of March, the cash position amounted to €379 million, which was about stable as compared to the end of last December.
This was the balance of positive free cash flow generated during the quarter, mainly offset by cash spent on share buybacks. Net working capital decreased to EUR 139 million at the end of March, down from EUR 157 million at the end of the fourth quarter. The number of days of working capital measured against quarterly sales increased to 86 at the end of the first quarter, compared to 82 days at the end of December. Working capital remained relatively high, caused by higher inventories for increasing activity levels going into the second quarter. On the back of the decrease in working capital and continued profitability, we generated free cash flow of EUR 20 million during the quarter. In the first quarter, we spent EUR 31 million to repurchase more than 600,000 of our own shares.
This is part of the buyback program that we announced last October and that we increased to EUR 100 million program last March. As of last week, we completed approximately 46% of the program. As announced last March, we propose to cancel 1.5 million of our treasury shares. We also propose a stable dividend of EUR 0.70 per share for approval at our upcoming AGM, which is scheduled for the 22nd of May. This marks the seventh consecutive year that we pay meaningful dividends to our shareholders. Let's now look at our ALD business. Looking back at 2016, based on our most recent assessment, the single wafer ALD market dropped in 2016. This drop was, however, not as high as we earlier expected when we did our earlier assessment.
This is caused by a few smaller segments of the ALD market where we have not been engaged, mainly in non-patterning related DRAM. As a result, our market share decreased. Our ALD revenue in 2016 ended up well in line with the assessment we made in July of last year. Our view on the underlying developments of the ALD market and the strength of our position has not changed. Looking more closely at the dynamics within the ALD market, we see continued strength in the logic Foundry segment. ALD is a key enabler to build the next generation of advanced FinFET devices. The logic Foundry segment will be an important contributor to the expected ALD market growth. As we discussed in earlier quarters, the introduction of the 10-nanometer node led to a step change in the use of ALD in logic Foundry.
With the 10-nanometer node, we have significantly increased the number of applications for which we are production tool of record, and we expanded our engagements with key customers in a meaningful way. Taking an early look at seven-nanometer logic Foundry, that node, we expect our addressable ALD market to further increase. Looking at 3D NAND, while missing out on the earlier stage of investments, demand for single wafer ALD and 3D NAND has clearly accelerated in the most recent quarters. The customers that we won in 2016 are ramping their 3D NAND devices in high volume manufacturing this year. In the first quarter, order intake further increased, and we recorded the first meaningful double-digit percentage sales contribution from 3D NAND. This year, the size of the 3D NAND part of the single wafer ALD market is already expected to exceed the size of the planar NAND market in 2015.
We continue to expect a significant contribution of 3D NAND to our revenue in 2017. Longer term, as customers transition to more complex, higher stack devices of 96 layers, for example, and above, we expect the number of single wafer ALD applications to further increase. In addition, in ALD for 3D NAND, we are actively engaged with other customers, which we expect to turn into another growth driver for us beyond this year. In DRAM, investments are still mostly focused on technology transitions within existing fabs, with a higher level of tool reuse as a consequence. A more meaningful recovery in demand for new ALD tools in this DRAM segment will be dependent on the resumption of capacity additions. Overall, looking at the structural drivers in our industry, the prospects for the ALD market continue to be strong. As a market leader, ASM remains well-positioned to benefit.
Let's now comment in more detail on the win that we announced in our EPI business. Traditionally, we have been a player in the EPI market. Our presence in recent years has at the same time been primarily limited to the analog and power markets. While an attractive area by itself, analog power only represents a small part of the total EPI market. The larger part of the EPI market is in logic foundry and 3D NAND. To address this larger and growing part of the EPI market, we have invested in new improvements on our cluster to the Intrepid for the last two years. In Q1, we qualified as process tool of record for an advanced EPI application at a leading foundry customer and recorded the first high-volume manufacturing order intake for this Intrepid tool. Let's now look at the broader market environment.
Market researchers like Gartner and VLSI are expecting the wafer fab equipment market to continue to grow in 2017, with year-on-year growth of between 8% and 9%. Gartner is forecasting the end market for semiconductor devices to grow by 12%, from a growth of 3% last year. That's due mostly to rising memory ASPs and increasing demands for application processors for automotive, industrial, and IoT. Now let's look at our guidance as included in our overnight press release. We continue to expect a clear year-on-year improvement in the single wafer ALD market in 2017, with demand in the logic foundry segment remaining healthy and a strong increase in the 3D NAND segment.
Based on that, for Q2, we expect a sales level of between EUR 180 million and EUR 200 million on a currency comparable level, and the order intake in Q2 is expected to remain at a high level of somewhere between EUR 190 million and EUR 210 million, also on a currency comparable level. At this point, we are more than happy to answer your questions.
We'd like to ask you to please limit your questions to not more than two at a time, so that everybody has a chance to ask a question. All right, Alex, we are ready for the first question.
Thank you. We will take our first question from Peter Olofsen of Kepler Cheuvreux. Please go ahead. Your line is open.
Good afternoon, gentlemen. I will limit myself to two questions. Maybe first on the outlook. You've provided very strong order guidance for Q2, which means that you will enter the second half with a pretty strong backlog. Could you maybe already give some indication on how you look at the second half of the year, how that might compare to the first half? On the outlook for DRAM, I got the impression that you're a bit more cautious there. You mentioned that a pickup in demand is dependent on capacity additions. While listening to some of your equipment peers, it seems spending in DRAM is limited only to some conversion, so there's hardly any capacity additions there. Am I correct that you're cautious on DRAM and maybe a bit more cautious than what you were earlier in the year?
Okay. Yeah, Peter, thanks for your question. To start with DRAM, we're cautious, yes, but not more cautious than a few months ago. Or than one and a half months ago, of course, because full year and Q1 results are very close to each other. We just reiterate the same view of a couple of weeks ago, only a modest improvement. Based on the fact that we don't see our key customers investing in DRAM in their new fabs. New fabs are so far exclusively reserved for 3D NAND capacity. As a result of that, they are mainly expanding DRAM capacity in their existing fabs through tech conversions. As a result of that, our view is that in the areas that we are engaged, that the demand for new equipment is still modest.
That's the view, Peter, but no different view from a few months ago. If we look at our projections for the year, as we made internally, they still use the same assumptions as some weeks ago. Okay. Your question on the second half. In general, we do foresee a healthy year for the industry and for ourselves in 2017, whereby, as we said before, logic Foundry segment with more emphasis to Foundry than to logic, will continue to contribute healthy throughout the year. We see year-on-year a strong acceleration of 3D NAND. Those two will support, we think, a much stronger year in 2017 based on current visibility than 2016.
Okay. Maybe it's a bit early, but at this moment, no reason to believe that Q4 will be materially weaker than what we should see in Q2, Q3?
Our detailed guidance went up to including Q2. Let's say, if you look at the year as a whole, we think the year as a whole is going to be a healthy year. If you look at the Gartner VLSIresearch, they also project the year to be between eight and nine%. We feel good about further building a strong position throughout this year. I would like to leave it at that for the moment. Of course, as soon as we can give you more color on a quarter-by-quarter basis for the second half, we will do so.
Okay. Maybe squeezing in one follow-up. Do you think you might be able to regain some market share this year in ALD?
Well, to be honest, again, we learned a little bit from our experience last year that it's very difficult to, since this is such a developing market, to have a view on all the detailed segments in the ALD market, especially when you're only in March of the year. Again, predictions on market share, I think it's a little too early. If you look at how we view our position in the segments that we compete, we feel very, very good about our position. Based on that we can grow the company year on year from 2016 to 2017. We don't view that, let's say, the competitive landscape is changing in a material way at this moment in time. We don't have any indications that is the case. We feel good about that.
Especially, you can see the increased contribution of 3D NAND, besides an increased share of wallet that we have been building up in logic foundry from node to node. Gives us the feeling that we are on the right track. Okay.
Okay. That's helpful. Thank you.
We will take our next question from Nigel van Putten of ING. Please go ahead. Your line is open.
Hi. Afternoon.
Hi.
Hi. I have two questions on the epitaxy order. Seems like an exciting development. Question is this a top three customer, this Foundry customer? Did you develop the application specifically with this customer for a specific application? Do you expect to also ship this to, in due course, to other customers for other applications as well?
Yeah. I think we did not ask permission to the specific customer to disclose their names. Only for that reason, I would like to not answer whether it's a top three customer, but it is a leading Foundry customer in the world. Whether we would like to reproduce this success at other customers, of course, we would like, but let's put it this way. We aim to broaden our position in the EPI market in general, yeah? As you understand the EPI market beyond analog power is in logic Foundry and memory. We look for opportunities. We've been working on opportunities, let's say beyond this specific application. As soon as we also book results there, the same as we are doing with this customer, we will let the market know. We're very happy that, it's the first high-volume manufacturing.
That means really a tool that goes into high-volume production. It's the first high-volume manufacturing related order intake and revenue contribution of this leading Foundry customer in Q1. As you know, the whole total addressable market for EPI is probably around EUR 600 million, of which the analog power market, in which we have been engaged so far, was only probably around EUR 100 million or so. This way, we are starting to broaden our addressable market within the EPI market. We do foresee more orders and revenue from this specific customer for this advanced EPI application in 2017. Our analog power EPI business is expected to remain a steady contributor year-on-year, compared to 2016 year-on-year.
At the same time, we do believe that it is possible that this year, our CMOS EPI revenue will be higher than our analog power business in 2017. It's an indication on what we are working on.
Thanks. It's very interesting. Actually, you already answered my other question on the power market because, maybe a bit more context. I see a lot of German IDMs or more automotive-focused companies also expanding CapEx heavily, building 300 millimeter fabs. Do you also think that maybe 2017 specifically could see higher growth?
Well, as I just said, Nigel, because it's a good question, that for now we would like to say that we expect at least that segment to have a steady contribution year-on-year. It's too early to say whether that contribution would be exactly in this year, bigger than last year. We do agree with you, that longer term, this is a very interesting growth segment.
Great. Thank you.
where EPI plays an important role.
Yep. Thanks.
Okay. You're welcome.
We will take our next question from Varun Rajwanshi of JPMorgan. Please go ahead. Your line is open.
Hi, this is Sandeep Deshpande. Just a quick question on the NAND wins. Can you talk about where your tools are being used, in terms of the deposition on the 3D NAND? Secondly, with regard to the EPI win, what are your intentions in the EPI business? You have been in the silicon EPI business, in the past. You lost some share. Now you seem to be coming back with a new tool. What are the long-term intentions in the EPI business? Thank you.
Okay, Sandeep. Good to hear you, being in the call. On EPI, I tried to provide some color in the answer provided to Nigel. Without repeating the whole thing, again, we'd like to reiterate, as we said in the introduction, we have been focused on analog power part of the market for the last couple of years. That's a combination of 200 and 300. You see that mainstream CMOS is more 300 millimeter only, and it's both in logic Foundry and in memory. We have invested a lot of money and resources in EPI over the last couple of years. You know we have a long history in EPI, but we had to do our homework to get our act together again on, let's say, the requirements the market and key customers have today. I think we made a lot of progress.
Of course, there's one strong competitor that owned that market so far. I think the industry would welcome, let's say, to have another viable competitor playing a role in that market. It would create a much healthier playing field. That competitor needs to show that they can perform. We made a first step on that path by being selected now for a specific advanced EPI application with a leading Foundry. Our ambition doesn't stop there. There's a lot of work to be done, and it's way too early to give, let's say, detailed indications where we will stand at the end of this year or next year. The engagements we have ongoing in the market are broader than with this one customer.
It's meant to address, let's say, a broader part of the total addressable market in EPI, because so far we have only been addressing EUR 100 million part of the market, in a total addressable market for EPI that's around EUR 600 million, and likely will grow in the coming years. They had a compound annual growth rate that is given on the EPI market is pretty meaningful, given to it by, let's say, also the external market watchers. That's the answer to your EPI question. To NAND. Where is it used in NAND? I think the biggest difference compared to our planar NAND engagement is that in the past, planar NAND engagement was, of course, primarily in patterning, sacrificial patterning-related films. Our engagement now is mainly in non-patterning, really structured device-related films.
As we shared in earlier calls, we are not engaged with all the 3D NAND players at this moment in time. We are engaged with a couple, and our ambition is, we now grow our revenue year-on-year based on the fact that the customers that we are engaged with are really building volume now. Really building volume in 48/64 stack environment. A little bit of mix of those two nodes. Going into next year, we would like to build on that engagement in terms of, as these customers, let's say, further develop volumes. We also have the ambition going, let's say, towards 96 stack and higher to also increase the number of customers that we are engaged with. Of course, node by node, increase also the single wafer ALD content with all customers. That is what we are working on, Sandeep.
Are you also involved with customers who are making 3D XPoint? Because that is also multilayer process, are you involved on the 3D XPoint side?
Yes. In the R&D phase, we are already for quite some time. Yeah, their, let's say, real P&L visibility on our side depends on when our customers will really ramp those products, when they can ramp those products with their customers, and as a result of that, are going to order more equipment. In our current models, we have not scheduled for any material growth there or contribution in this calendar year.
Thanks, Chuck.
Okay. You're welcome.
As a reminder, if you would like to ask a question, please press *1 on your telephone keypad. Our next question comes from Jim Santinelli of Arete. Please go ahead, your line is open.
Yeah. Hi, afternoon. Just following up on the EPI win and the non-ALD portion of your business. First of all, do you think the non-ALD revenues for the business will outgrow the broader SPE CapEx environment this year?
In terms of percentage-wise, for sure. For sure it will.
Okay. For EPI power specifically, could you maybe just remind us where you think you are in terms of market share, either for EPI power specifically or for EPI overall?
Jim, could you repeat that question one more time?
Yeah. For the EPI market, could you remind us where you think you are for market share currently, either for the overall EPI market or for EPI power?
Oh. I think if you take the numbers we mentioned earlier, a total market of EUR 600 million, only EUR 100 million of that market is analog power, that has been the only market we have been engaged in, you can calculate that our market share so far in that market has been very modest.
Okay. Thank you. Maybe just looking to the future a little bit. If you could, can you give us an update on maybe where ALD stands in terms of roadmap or node adoption for selective deposition, and whether you're working on that specifically with any of your customers. Also whether you're looking at internally addressing the thin-film deposition market for flexible OLED, when it commercializes in a couple of years.
We are through our research institute and also through the N plus, let's say three, four, node departments of our customers. We are of course looking at all these developments. In parallel to, let's say, the more immediate needs by customers, N+1, N+2. The answer is, yes, we are investing in that. Because, of course, that is very important to build on our ALD position in the market now. We really try to balance our R&D well between, let's say, supporting our immediate customer needs now and securing our leading position three, four years from now. That's what we really try to balance when we set our budgets, when we determine how to allocate our R&D budgets for the year among the different departments in the organization.
If you ask us, is there any contribution foreseen short-term of these segments that you just mentioned, specific segments that you just mentioned? Well, not really in a material way in the next 12 months.
Okay, thanks. Within that answer, were you confirming that you are looking at developing thin-film deposition application for flexible OLED?
I am glad that you reiterate that so that my answer is not misread. We always look as part of our strategic planning at, let's say, adjacent markets, how we could apply our strengths to adjacent markets. Our number one priority today is to strengthen our position in mainstream semi and accelerate our growth there.
Okay. Sorry, maybe just the last follow-up on that. Is that because on the OLED display side, it's a different type of ALD technology that's required that would require an entirely new R&D stream or tool development roadmap? What's specifically stopping you from porting over some of your existing ALD skills into thin film for OLED?
It's just a combination of factors that you use. You look at just prioritizing. It's just a matter of prioritizing. It's just a matter of prioritizing whereby technical, commercial, customer requirements, further building on existing customer relationships, and based on all of that, you prioritize your R&D projects. That made us rank it this way at this moment. Maybe offline, we can talk about this a little more.
Understood. Thank you.
Thank you, Jim.
We will take our next question from Tammy Qiu of Berenberg Bank. Please go ahead. Your line is open.
Hi. Thank you for taking my question. Firstly, it would be great if you can share your view that you have the target total addressable market for ALD by the time of 2020 timeline-ish. Can you share which portion within that total addressable market will belong to logic foundry and 3D NAND? Also, if we think about the blue sky scenario, if there is further upside to your addressable market target, where that can come from? Thanks.
Okay. Well, it's clear that, Tammy, thanks for your question. We highlighted that before that until 2015, memory was the number 1 contributor to the single wafer ALD market, within memory, especially DRAM. That as of 2016, logic foundry is, in our opinion, the biggest contributor to the single wafer ALD market. With our current view on the market, we don't think that that will change in the coming years. Logic foundry will stay the biggest segment. At the same time, we will see the 3D NAND contribution to rapidly increase. There's a double-digit % growth of 3D NAND contribution, for example, to the single wafer ALD market in 2017. With the visibility we have now, we think that there is also a double-digit % growth of the 3D NAND contribution year-on-year possible in 2018.
To give you an indication on that. Your second question is, are there.
Upsides
upsides to the market.
To the total addressable market for single wafer ALD, which segment can be the contributor to that upside?
I think it's too early to tell. We are working on certain developments, certain, let's say, application and product developments that could further, let's say strengthen the single wafer ALD market as whole, it's too early. We have to see how these engagements work out, based on that, a bigger market could develop. It's just a little bit too early to tell. Maybe, in 2018, Tammy, we can assess that a little bit better. Again, we had to adjust the market estimate one time, by delaying the EUR 1.5 billion with one and a half to two years. We want to make sure that we only change our current guidance to the market when we really have a good visibility on that. One thing we're pretty confident about is that the EUR 1.5, to us, will not be the end size for this ALD market.
We are strongly of the belief that that will not be the end size of this market. There's a lot of potential beyond the EUR 1.5. Just timing-wise, this is so far out, a lot can happen. Also to the positive. We don't exclude upsides, but too early to quantify or provide more color.
Okay, thank you. My follow-up is, in those markets, in memory, logic, is there any in terms of gross margin? For example, if you are basically new into the 3D NAND market, does the tools actually carry a lower gross margin compared to foundry logic, which is more mature?
That's not the case. The situation remains the same to what I've mentioned in earlier calls. I think we have certain applications for certain customers which might have a lower or higher margin. You see that also somewhat fluctuated in our gross margins there, where we have in Q1 now 43.5%. You also have sometimes that, when you introduce a lot of new applications and a lot of new tools in the markets, that the initial tools might have a little bit lower margin simply because you have to go through the learning with your customer. In general, we see that those margins are all at a very healthy level. Hence, the commitment that we have provided earlier that we expect our margins to be in the low to mid 40s to remain the same.
Okay, thank you.
We will take our next question from Robert Sanders of Deutsche Bank. Please go ahead. Your line is open.
Yeah. Hi, good afternoon. I was just wondering first, if you could just think about the, I don't know if you have this number at the top of your head, but if you look out to 2021, how does your ALD business split between patterning and non-patterning? I have a follow-up. Thanks.
Okay, Rob. Yeah, thanks for your question. Yeah, patterning and non-patterning. Well, let's give you a little bit of perspective how we have seen it develop in the last two years. First of all, on the market as a whole, versus 2015, the % contribution to the single wafer ALD market has gone down in 2016. Yeah? The % contribution of patterning to the single wafer ALD market has gone down in 2016 versus 2015, and it is believed, based on our current visibility, to further decline in 2017. In other words, the development of the single wafer ALD market will become less dependent on patterning only. Still a decent contributor, but it will become less dependent on that segment only.
Also, in dollar size, we think that the market has experienced a double-digit % decline, in terms of patterning contribution, going from 2015 to, let's say, this year. Yeah? We think patterning will stay an important part of the market. If you look at the projections towards the EUR 1.5 billion in 2021, let's say it will be less of a determining factor than it was before in reaching that number. Again, the contribution is still a healthy one, but it's less of a contributing factor. It's not the most important growth engine, on the contrary, in the coming years, in that market to develop towards EUR 1.5 billion, based on, again, the visibility we have today. Also, if you look at our revenue, the contribution to our single wafer ALD revenue, this year is expected to be lower than it was in 2015.
Other segments have become more important Yeah. there are more stronger enablers. Have become stronger enablers for growth. I think, to us, we view it as a positive that we have broadened the exposure and the penetration of ALD, beyond, let's say, patterning, which was a double patterning, multi-patterning, which was the main driver in 2014, 2015.
Got it. Is patterning a majority still today, or you prefer not to say?
Yeah. We don't want to provide that much color.
Okay.
Again, I trust we gave a lot of color already.
Okay. My follow-up would just be around the sort of pricing behavior of your competitors in ALD. I think historically, they've struggled because they couldn't match your performance, particularly for patterning applications, your throughput. In the non-patterning applications, they seem to have had some success. I was just wondering if you'd seen any change in the pricing environment or have some given up, perhaps, because they missed some of the big windows like TSMC, et cetera. I was just wondering if you could update that. Thanks.
I think we really have seen in the non-patterning area, we have seen some competitors really step up and build revenue there. In line, let's say, with what we foresaw. Pretty much in line with what we foresaw they would do. We definitely don't want to say that we ignore their penetration level, because there are some penetrations in the non-patterning field, and especially since in 2016, let's say the logic foundry area was the most important part, and combined with 3D NAND, where the investments took place, and there was less investment in DRAM. In the memory space, in the DRAM space, where, of course, let's say, the primary patterning competition was, there was less investment in 2016. The competition was less visible because we all experienced less of business there.
Got it. Okay, thank you.
As a further reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Nigel van Putten of ING. Please go ahead. Your line is open.
Hi. Thanks. Yeah, I have a follow-up on the last question, and more broadly. It seems from the underlying sort of market share data that's provided by Gartner, that a couple of companies that have taken a spatial route, so using spatial tools, have been quite successful. Is there any connection or correlation between sort of the success of those tools, maybe patterning, or not, in 2016?
Well, I think it's not wise to go into a review of competitive tools exactly linked to specific applications. If your question is, do we see inroads that the spatial tool has made in spatial technology, has made into the industry, then we absolutely, yeah, can confirm that they have made some inroads in certain applications in the field and at multiple customers. Yeah, the main thing we can say about it is that we are fully aware of it. That we think that based on our competitive intelligence, we know reasonably well in what areas these tools are active. Yeah, we just include that in our own strategic planning on ALD, and in the way we prioritize the funding of our ALD programs to ensure that we keep growing. That's the main thing, Nigel, I would like to say about it.
Understood. Maybe one follow-up. Do you think that the areas your tools are focused on have higher growth, CAGR, towards 2020, than maybe the applications where these spatial tools were developed for?
Can you say that one more time, Nigel?
No, sorry. It was just, I think in the question before, you mentioned that you were seeing applications that were seeing higher growth, you were quite successful in. My question is, do you think that maybe the applications these spatial tools are developed for are showing maybe somewhat lower growth than the applications you have chosen to pursue?
I don't think we are able to say that.
Okay.
I don't think we are able to say that at this moment in time. They may experience also healthy growth in the areas that they have chosen to pursue on. I think that would be too fast to confirm that, Nigel. Okay?
Understood. Thanks.
No problem.
We will take our next question from David O'Connor of Exane. Please go ahead. Your line is open.
Great. Thanks for taking my questions, gentlemen. A couple of rapid fire from my side, if I may. Firstly, on the foundry orders, you mentioned at the start of the call they decreased in Q1 quarter-on-quarter, but still at healthy levels. Do you think we've peaked at this point for foundry orders? Understanding that they're still going to remain healthy through the year. That's my first one. Maybe second one on 3D NAND. Can you give us also an indication of the increase in the application intensity moving from 64 layers to 96? How should we think about the content increase there? Are we going from just a couple of layers to half a dozen? Any color there would be helpful. Thirdly, maybe on the EPI side of things, maybe one for Peter.
Can we expect kind of gross margin at similar levels given the ramp-up of the EPI through the rest of the year? Should we expect some kind of headwind there, given your comments earlier? Is this foundry win, is this for a leading-edge node or is it more kind of lagging edge on the EPI side? As a lastly, if you could give us some kind of indication, what's the competitive advantage of your Intrepid tool there? The win, is it really because of there's only one other customer addressing that space, so there's kind of some pent-up demand for competition? Or is there a real advantage with Intrepid? Thanks.
Okay. Well, that's a whole list of questions. Okay. Peter, you want to do your question first?
Yeah. Shall I take the gross margin, EPI margin? Yeah, it's in line, David, what I said earlier. We do not see that the EPI tools have a different margin from the rest of the tools that we have in our organization. The issue is, of course, that during a start-up for new products, and that's not only for EPI, that's for all the tools that we have, then the initial tools might have slightly lower margin than the repeat tools that we have. That might have a small impact on our gross margin quarter after quarter. That's what we call and what we always have mentioned as being the impact of mix changes over the quarters. I trust that that answers your question.
Yes. Thanks, Peter.
Okay. I think four other questions. First, did we peak our foundry business in terms of bookings in Q1? The answer is that we foresee, based on current visibility, very healthy contribution of foundry throughout the year. That's the answer on that question. 64 to 96 stack content. Basically, you're asking to quantify that a little bit more. Yeah, that's a little tough at this stage because we are in qualification of course, still on 496 stack with several customers. It's too early to say which applications will really make it, and that will determine how big the upside is. We can say it's really multiple, let's say, layers that we are addressing with multiple customers, let's say, from node to node.
It is a meaningful upside that we have node to node from 64 to 96, and I prefer not to say more than that at this moment in time. Hopefully in the next few quarters, when customers are closer to freezing their processes, we can provide you a little bit more color. We also would prefer to only give you the color when we don't have to come back on those estimates later on. That's that. Your question was on EPI, whether it's focused on, let's say, leading-edge nodes. It's focused on advanced applications and advanced nodes. I don't want to say more about it because we're not allowed to talk to specific customers related to this penetration. That's that. On the competitive advantage of the Intrepid, we have not specified what specific application it is.
I can tell you, we've been working on this tool for the last two years in multiple ways. We've been looking at the reliability of the tool, we've been looking at the cost effectiveness of the tool, and we've been looking at the technical performance of the tool. All those aspects have been taken into account. Again, we have a long time history in EPI for Tens of years. We just were not focused on mainstream CMOS for a number of years. We made a strategic decision, as we shared with you, let's say, for the last two years, to change that, to increase that focus and to make it a strategic area of attention. That's now starting to pay off. When you want to participate in a broader way in the market, you cannot just focus on one element of the tool.
That's what we have been doing. This is the first payoff, whether more customers will take, how much it will take to get in there, we will keep you informed, let's say, in the coming months, years, as we can claim new victories. It's really early to claim more victories than the one we announced overnight. All right?
Very clear. Thank you.
Okay, David. Thank you for your question.
We will take our next question from Jim Santinelli of Arete. Please go ahead. Your line is open.
Yeah, thanks. Just a quick follow-up, if I may. On gross margin, you saw a slight downdraft in 1Q gross margin. I just wanted to get an idea of what that was related to. I guess it's a product mix issue behind that, but it would be nice to get a little bit more detail, if you could.
Yeah. I cannot add much more than what I said earlier, Jim. We have, of course, a lot of applications that we serve with a lot of different customers. As you can imagine, not all the margins on every tool are the same. Depending a little bit on what sort of mix that you have within the quarter, there could be small shifts between the gross margins. As you have seen last year, where we were always in the high 43%, often the 43%, 44% level. There's not that much to be added. The 43.5% versus the 43.9%, which we had last year in the first quarter, and the 44%+ that we had in the fourth quarter are, for me, very minor differences.
There is nothing behind that which I can give you some more details about it, other than what I said, the shifts or the separate mix from applications and customers.
Okay. It's not necessarily the case that you saw a greater proportion of 3D NAND shipments in the first quarter versus any quarter last year that was a contributing factor to that?
Absolutely not.
Okay. Did you ship any Intrepids in the first quarter?
Yes.
Okay. Thank you.
We did.
Ladies and gentlemen, that will conclude today's Q&A session. I would now like to turn it all back to the speakers for any additional or closing remarks.
All right. I would like to thank you all very much for your detailed questions. Also on behalf of Peter, Victor, and others who's in the company. Let's stay in touch in the coming months, and any follow-up questions that you may have, of course, feel free to touch base with us. All right. Thanks again, and all enjoy the rest of your day. Bye-bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.