Good day, welcome to the ASM International Q1 Results Call. At this time, I would like to turn the conference over to Mary Jo DeCoursey. Please go ahead, madam.
Thank you, Teresa. ASM issued its 2015 first quarter results last evening. For those of you who have not seen the press release, it is accessible on the website, asm.com. Also available on the website are the latest investor presentation and the 2014 annual report. 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 vary materially from those expressed or implied in such statements. These include, without limitation, statements relating to revenues, margins, cost reduction programs, liquidity, break-even levels, strategies, and economic conditions. Please refer to the ASMI press releases and filings with the U.S. Securities and Exchange Commission on Form 20-F and 6-K for more information on the risk factors that could affect results.
All forward-looking statements are based on information as of today, April 24th, 2015. The company assumes no obligation to update these statements. I will now turn the call over to Chuck del Prado, President and CEO. Please go ahead, sir.
Thank you, Mary Jo, welcome to everybody today on the call. Before we start the review of our first quarter financial results, I would like to inform you all that this is a pretty historic moment. It's the last conference call that Mary Jo DeCoursey is hosting for us. Starting with the Q2 2015 earnings call, which will be held on July 30th, this conference call will be hosted by our Director of Investor Relations, Victor Bareño. Mary Jo has served ASMI for over 30 years, 30 years, as our primary contact in the U.S. for analysts and investors. I would like here, on behalf of the whole company and the investor community, to take this opportunity, Mary Jo, to thank you for your commitment to the company for all these years. Of course, we'll pay separate attention outside this call on this also.
After this message, let's now review our first quarter financial results. Revenue in the first quarter increased to EUR 162 million, up 30% from the fourth quarter and slightly exceeding our guidance for a range of EUR 150-EUR 160 million. Compared to the first quarter of 2014, revenue increased 7%. Our combined ALD and PEALD business continues to be the key driver behind the increase in revenue. By market segment, first quarter revenue was led by memory customers, both DRAM and NAND Flash. The gross margin remained at a solid level of 43.3% in the first quarter, which compares to 43.0% in the fourth quarter of last year and 43.7% in the first quarter of 2014. SG&A expenses decreased by 1% compared to the previous quarter. R&D expenses increased by 10% compared to the fourth quarter.
Apart from a currency impact during the quarter, this increase is also part of our aim to keep R&D relatively stable as a percentage of revenue over time. We generated operating income of EUR 29 million in the first quarter, with an operating margin of 17.6%. This compares to operating income of EUR 13 million in the fourth quarter and EUR 33 million in the first quarter of last year. Financing result in the quarter was EUR 28 million positive and mainly consisted of a translation gain. In the fourth quarter of last year, the financing result included a translation gain of EUR 8 million. As a reminder, a substantial part of ASMI's cash position is denominated in U.S. dollar, and the significant appreciation of this currency in recent quarters led to the aforementioned translation gains.
Results from investments, which reflect our 40% share of the net earnings from ASMPT, improved to EUR 13 million for the quarter, up from EUR 6 million in the year ago period. In the fourth quarter of 2014, results from investments amounted to EUR 9 million and to EUR 18 million excluding a one-off tax related item. These figures exclude the ongoing amortization charge, which amounted to EUR 7 million in the first quarter. For the full year, this charge is projected at approximately EUR 27 million. The increase compared to 2014 is explained by the appreciation of the Hong Kong dollar. In the first quarter, ASMPT sales fell quarter-on-quarter by 11% to HKD 3.1 billion, reflecting the seasonal pattern in the back-end industry. Compared to the first quarter of last year, however, sales increased by 23%.
ASMPT's net earnings on 100% basis amounted to EUR 34 million in the first quarter, compared to EUR 23 million including one-offs, and EUR 45 million on an adjusted basis in the fourth quarter. ASMPT reported bookings of HKD 465 million for the first quarter, an increase of 36% compared to the fourth quarter, and an increase of 15% compared to the first quarter of 2014. Turning back to ASMI's consolidated operations. ASMI's net earnings on a normalized basis amounted to EUR 67 million in the first quarter, up from EUR 27 million in the fourth quarter, and up from EUR 33 million in the first quarter of last year. Our new orders in the first quarter remained at the strong level of EUR 158 million, 3% above the level in the fourth, in line with our guidance of somewhere between EUR 145 million and EUR 165 million.
Similar to revenue, orders were mainly driven by the combined ALD and PEALD product lines. In terms of customer segments, bookings were led by the foundry segment and the memory segment. Let's now look at the balance sheet and cash flow. At the end of March, the cash position increased to EUR 423 million, up from EUR 386 million at the end of December. This increase was the result of positive currency effects on the cash position, positive free cash flow generated during the quarter, and partly offset by cash spent on the share buyback. As discussed on earlier occasions, it is our policy to maintain a strong balance sheet and to use excess cash for the benefit of our shareholders. Net working capital increased to EUR 123 million at the end of March, up from EUR 108 million at the end of the fourth quarter.
This increase was mainly caused by currency translation differences. On a currency comparable basis, working capital would have been EUR 105 million at the end of March. The number of outstanding days of working capital measured against quarterly sales decreased to 68 days at the end of the first quarter, down from 78 days at the end of December. On the back of solid profitability and improved working capital efficiency, we generated a strong operating cash flow of EUR 36 million during the quarter, up from EUR 7 million in the prior quarter. In the first quarter, we spent EUR 28 million to repurchase 737,000 of our own shares at an average price of nearly EUR 38.5 per share. This is part of the EUR 100 million share buyback program that we announced last October. An amount of EUR 31 million was settled during the quarter.
At the end of March, we completed approximately 60% of the program and 70% as per today. The number of outstanding basic shares decreased to approximately 62.6 million shares at the end of March, down from 63 million at the end of December and 63.7 million at the end of the third quarter. As announced last month, we have proposed a 20% increase in the dividend to EUR 0.60 per share for approval at our AGM, which is scheduled for May 21st. This marks the fifth consecutive year that we pay a significant dividend. Let's now look at our business. The strong momentum in the first quarter again shows that ALD is a solid growth driver for our company. ALD and PEALD have become mainstream technologies that support our customers in staying on Moore's Law.
As we indicated earlier, in 2014, our combined ALD and PEALD business accounted for more than half of our total equipment revenue. In the last quarters, we already highlighted the expansion of our customer base. The leading manufacturers have already ramped multiple device generations based on our ALD and PEALD products. For these industry leaders, we have become strategic partners in the development of ALD and PEALD technologies. In the more recent periods, we have also penetrated new customers with our ALD and PEALD products. In 2014, we recorded a substantial first-time revenue contribution from a number of these new customers as they began ramping ALD and PEALD in high-volume manufacturing. Including the tool of record selections that we secured last year, we now supply our ALD and PEALD products to all of the top 10 CapEx spenders in our industry.
We believe this successful growth of our customer base, as well as our expansion to new ALD and PEALD application, demonstrates the competitiveness of our products. As discussed during our last results conference call, we expect our addressable part of the ALD and PEALD market, the single-wafer mini batch part of that market, to double over the next three to four years. That is doubling compared to a baseline of more than $600 million in 2014. Taking this three, four-year horizon, we see a number of strong market drivers. In memory, we see a continued and growing need for advanced multiple patterning solutions. As most listeners are probably aware, we have a strong position with our PEALD technology for spacer-defined double patterning. In the logic and foundry segments, the transition to FinFET devices will provide significant opportunities for the ALD and PEALD market in general.
Over the next three to four years, we expect that successive generations of FinFET devices will require a steady increase in the number of ALD and PEALD process steps. This includes ALD and PEALD process steps arising from the expected increased need for multiple patterning in advanced logic and foundry processes. In short, prospects for our ALD markets in the coming years are strong, and as a market leader, we believe we are well-positioned to benefit. Looking at the market environment, and specifically at the semiconductor end markets, conditions have recently been mixed. Against this backdrop, market watchers such as Gartner and VLSI Research predict slower but still positive mid-single-digit growth for the wafer fab equipment market in 2015.
In the logic foundry sector, equipment spending in 2015 is expected to be driven by high-volume manufacturing investments in the 16 and 14 nanometer nodes, and to a lesser extent, on development tools for the 10 nanometer node. In the memory market, the strength of last year has carried over into this year. Spending in memory in 2015 so far looks healthy in DRAM on the 20 nanometer node and on NAND Flash on 18, 16 nanometer. The timing of these investments seems somewhat weighted towards the first half of this year. Let's now look at our outlook, as we also shared with you in our press release overnight. On a currency comparable level, we expect Q2 sales to be between EUR 180 million and EUR 200 million, while the Q2 order intake is expected to be in a range of somewhere between EUR 160 million and EUR 180 million.
For the second half of 2015, the current visibility remains limited. At this point, we are happy to take any questions you may have.
Teresa, could you give the instructions for questions, please?
Certainly. Thank you. If you'd like to ask a question at this time, please press the star or asterisk key, followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Pieter Oliphant from Kepler Cheuvreux.
Good afternoon. I have two questions. First, on the gross margin, and then on the memory side of the business. Starting with the gross margin, it has been around 43% for some four or five quarters in a row now. Is this as good as it gets, or is there potentially some further upside to the gross margin? On the memory side of the business, listening to some of your customers and some of your peers, it seems that it's generally expected that 3D NAND-related spending is expected to pick up in the second half of the year. Could you talk about how ASMI is exposed to 3D NAND, which of your product lines may be involved, and what kind of applications should we think of?
Okay, let me start with the gross margin, Pieter. First of all, as what we said in previous calls, we expect that we'll do gross margins in the high 30s in a downturn to the low to mid 40s in an upturn. That still stands. Maybe it's good to give you a little bit of color on what happened in Q1 in our gross margin, because we have seen two opposite effects. The positive effect was, of course, with the high sales and also the forecast that we have provided for the second quarter. The high loading of a factory, that worked very well. However, the negative factor that we have seen, especially in Q1, was the relatively weak mix in the products that we have delivered. We have shipped quite some systems to new customers with relatively low margins. That's a little bit of the mix back.
That is opposite of the 43% that you have seen in previous quarters, where we mostly have a rich mix in combination with the loading, which was reasonable, but was not at the high side. I think that gives you the color that you were looking for.
Maybe one thing to clarify, there was no meaningful impact from currencies on the gross margin.
No. That's completely neutral. We basically have a translation difference, only translation differences. What we also have disclosed in our Q report is what the impact is on the different lines there, as well as the sales side, as is the gross margin, as on the different cost lines. When you calculate that through, then you will find out that there is only a translation issue.
Okay, that's clear.
Okay, Pieter, on 3D NAND. Indeed, it is possible that 3D NAND will gain some traction towards the end of the year. At the same time, we also would like to emphasize that it clearly has shown that the transition towards 3D NAND from planar has taken much longer. We still have to see how rapidly that transition now will take place. As soon as it starts to accelerate a little bit towards the end of the year, that's a remark we would like to make up front. At the same time, when that transition happens, as that transition happens, it will have a mixed impact on the company. On one hand, the amount of double patterning will significantly go down. That is a negative implication to us. At the same time, new ALD applications will pop up, going towards 3D NAND.
As we have shared with you before, we have strengthened our engagement in R&D with 3D NAND over the last, let's say, two years. We expect that going into next year, also high volume penetration of VNAND will show up in our P&L. It may not immediately be at the same level as the double patterning demand in planar, but we are confident that it will show up in our P&L, step-by-step increasing as of next year. That is just based on the fact that through our ALD engagement with memory throughout the years, our relationships on the R&D level with these customers is very good, which offers us also an opportunity to build on that towards, let's say, the VNAND trends that the industry is showing now.
Okay. At this stage, you are not willing to talk about which specific applications you may be targeting?
No. I also don't know if by the time we will get into that market, we would be very specific on all the applications. We will try to share with you as much as we think is responsible also in terms of the competitive landscape that we operate in. At this moment, it's too early, Pieter, to share that. For us, it's very clear on what applications we are engaged, and we also have clearly identified specific applications that we expect next year to go into high-volume impact. Okay?
Okay. Maybe one final question on this specific topic. Is your opportunity in 3D NAND dependent on the number of stacks in the 3D NAND device? Because it seems that there are several generations of 3D NAND devices in development, and with each generation, the number of stacks will go up. Should you benefit from the number of layers going up?
Yeah, I think it's more a matter of that our focus has in time increased on vertical NAND. It's just our R&D focus has increased. Just we have put more intellectual bandwidth in that area. As a result of that, the step towards 48 will enable us to really start to play a role in a meaningful way in the VNAND space.
Okay. Thank you.
Okay. You're welcome.
Thank you. Our next question comes from Tammy Qiu from Berenberg.
Hi, guys. Thank you for taking my question. First one is that I would like to understand a little bit from your side, what's the impact is from TSMC and Intel's CapEx cuts? Because, from my understanding, multi-pattern is pretty much still a foundry and logic dominant technique. Also, the second question is that, from your perspective, looking at what your competitor has been saying on Monday evening, what's your view in terms of their progress into this ALD market, and what advantage do you think you have against them?
Okay. First of all, Tammy, on TSMC and Intel CapEx cuts. I think let's put it this way, our engagement with these customers and also our planning, our sales forecast, our bookings forecast is four to six quarters out. Let's put it this way, the recent announcement of these customers has not significantly, in a meaningful way, changed our projection for the remainder of this year. Basically, we already had a certain view on the level of engagement in current and future nodes that they would make. These public announcements did not necessarily change our view on that. That's an answer on the first part of your question. On the competitive landscape, I think what you can say, and I've repeated that in many calls on the competition over the last few quarters. This market is developing into a sizable market, the ALD market.
Competition is, here and there, stepping up. Yeah, that's what we are facing. Sometimes, competition is looking for applications that we are not that much focused on at this moment in time. In other areas, it is the drive of our customers for reduced cost of ownership. Based upon which, there is also an incentive to bring in a second supplier to create a healthy playing field. That's just what we are seeing. In that way, the developments are not necessarily different from our view three months ago.
Yeah, I think also if you look at our revenue and bookings performance in Q1 and our guidance for Q2 on sales and bookings, you can also see that the development of the company is still moving in the right direction because of the fact that this market in general is growing and will keep growing in the next couple of years. Again, we expect this market to double, very likely in the next three to four years, and there's room for more than one player. At the same time, we maintain having our ambition to maintain a leader in this part of the market has not changed.
Okay. Thank you, guys. Last question. On your tool design, because from what I understand is that your competitor is having a different chamber design or tool design compared to your ALD tool. Do you think from architecture perspective, your sort of pumping design is more kind of favored by the chip making sort of their spacious design? Just purely from architecture perspective.
I think our customers have to decide that, design also benefits also depend on what specific applications the customer is using it for. What we know is that, without, let's say, going into a detailed review of the designs of our competition, is that we have 15 years of experience in this ALD business, that we have done over that 15 years, a lot of CIP on our hardware, on our process technology. That we have the broadest engagement in ALD in the industry with the top 10 across the broadest range of applications. Yeah, we are very focused to learn from that. It could very well be that for a specific application, a competitor may have a favorable design. That is very well possible.
Again, it doesn't change the comments we made a few minutes ago, that we are confident that we have a design, relationships with our customers at a strategic level, based upon which we really believe we can grow in the coming years, and we believe we can stay a leader in this part of the industry. There will be room for competition to also grow in this area. It would be naive to assume that that is not going to happen. That's just consistent with what we said all along. I trust, Tammy, that that answers your question.
Yes, it does. Okay. Thank you, guys.
Thank you. As a reminder, ladies and gentlemen, to ask the question, please press star one on your telephone keypad. We will now take our next question from Sandeep Deshpande from JP Morgan.
Yeah, it's Sandeep Deshpande from JP Morgan. A few questions. Firstly, Chuck, when you reported full year results a couple of months ago, you gave guidance for Q1 as well as gave some indications on Q2 as well, but you are not commenting on second half, third quarter specifically at this point. Can you just talk about what is different this time? Is it just that the visibility is too low for you to make any comments on third quarter at this point in time? Secondly, you also mentioned in your prepared remarks that you're already doing some work on 10 nanometers with some of your customers. Can you shed some light on how do you see in terms of like-for-like increase in terms of ALD penetration at 10 nanometers compared to maybe 14, 16? Is there any increase that you see because of new applications, et cetera?
Okay, Sandeep. Thank you for your questions. First, on the second half of 2015. Well, the best way probably to answer is that, of course, our guidance for Q2, we believe is pretty strong. We have a strong sales outlook for between EUR 180 million and EUR 200 million. That is a bit helped also by some delayed revenue recognition of earlier tool deliveries and POs from some of our customers. If you look at Q2 also, we have a strong bookings outlook, EUR 160 million-EUR 180 million, and that is somewhat helped also. We believe it will also be somewhat helped by some pull-ins, some pull-in POs, likely from Q3 into Q2 from customers that would like those tools a little earlier. Taking that into account, the dynamics of Q2 and looking at the second half.
For Q3, it's very likely that we will have pretty healthy sales driven by the strong bookings guidance that we have provided to the market for Q2. Bookings in Q3 likely could be lower in a meaningful way. They could be significantly lower than Q2, based on two factors. First of all, based on the pull-ins from certain customers of bookings from Q3 into Q2, as we mentioned, but also that some customers are digesting capacity, maybe in part of the second half that they have built over the former quarters. Based on that, the second half as a whole, in terms of sales, may show a similar pattern, likely as the second half of 2014 versus the first half of 2014, that it is somewhat weaker than also this year in the second half than in the first half.
In terms of bookings beyond Q3, we are looking forward to a next round of investments that logic, foundry, and memory are preparing by that moment in time for next technology nodes. We have to see whether customers will already materially place those orders in Q4 or that they will wait until Q1, in terms of bookings. We do know that we are well-positioned for that. That ties to your second part of your question to 10 nanometer engagement. In our opinion, in logic foundry, we are very confident that the amount of applications that we will be engaged on will significantly increase, going from 16, 14 to 10. That's across the board.
Understood. Are you engaged with more than one customers on 10 nanometer, or is it only with leading logic player at this point in time at 10?
No, with more than one.
Okay. Thank you.
With basically all the key players.
Thank you.
Okay, you're welcome.
Thank you. Our next question comes from Jim Fontanelli from Arete Research.
Yeah, thanks for taking my question. Maybe just a few to run through. Firstly, could you talk about the theme of reuse? Obviously, that's been quite a significant part of your peers' commentary over the reporting season thus far and quite a structural change from what we've seen through prior cycles. Could you talk about the impact on ASMI? I'm guessing, given ALD is a new technology, only been in there a couple nodes, that reuse is not going to be impacting you significantly. It would be useful to get your thoughts on that. Secondly, could you talk about where you see the delta for the second half? You've obviously just given some color on potentially sequentially down second half versus first half. It would be interesting to get a feel for where you think the delta is in the second half.
Again, your peer group commentary has pointed to relatively flat logic foundry NAND spending and a tailing off of DRAM. It would be interesting to see whether that is the delta for you. Thirdly, it would be interesting to understand when we look at 10 and when we look at seven nanometers, where you think the key areas of opportunity lie for you. Is it primarily within foundry and logic for multi-patterning? Is it the fact that by the time we get to that point, we'll probably be up at 64 NAND and you can start reintroducing ALD significantly into that? Where the key technology drivers for you are as we get to 10 and seven. Thank you.
Yeah. Jim, we could not understand the first part of your question. You asked three questions, the first part of your question, could you repeat that?
Yeah. It was to get your view on reuse. There's been a lot of tool reuse from node to node, particularly from 28 and 20 nanometers down into 14, 16. Effectively tools being transferred across from node to node and therefore not generating new orders. It would be interesting to understand whether that's part of the order trend that you guys are having to deal with at the moment, or whether because ALD is such a new technology that reuse is not a factor in how you're thinking about revenues and orders over the next 12 months.
Okay. On equipment reuse, well, it's somewhat new. Yeah, it of course allows our customers to extend and optimize their investments. We have, in some areas, in part of our product portfolio, we have run into it, and we are able to service our customers in the right way. In ALD, we have not seen reuse in a meaningful way as it's a relatively new market, and it's growing so aggressively that there is basically no time or little time to consider reuse. It's more expansion of capacity. Is the pattern on reuse going to change in a meaningful way in the coming quarters? Our current visibility is no.
On your question on the second half, I think, again, we gave clear guidance on Q2, and we gave quite a lot of color on the second half, and I think it's too early to go into more detail on that. I trust we gave enough color. On 10 nanometer, yeah, the key areas, it's a combination. It's a combination of patterning demand, but also new engagement, new applications that pop up in 3D FinFET areas that drive our customers towards ALD because just traditional CVD, PVD technologies run out of steam. We have engaged with the customers on those 10-nanometer needs for at least two years, if not more, already in providing them solutions in developing their end customer devices. I think we know pretty well what very likely will go into HVM next year.
Looking at the 10 and seven-nanometer roadmap from your customers, and particularly if you think about Intel, they are talking about potentially using selective deposition at seven, but definitely at five nanometers. Is that something you're engaging with specifically with Intel on?
In general, I can say we absolutely are now already engaged in developments in general with our customers beyond the next technology node. Basically, selections for the next technology node are already in their final stages. Customers in one or two quarters are about to make equipment, put their orders in place. Automatically, that means that R&D for the nodes beyond the next nodes are already ongoing in a very intensive way, and we are definitely a player there.
Maybe just a last question, if I may. On the logic and foundry side, clearly there is significant use of double patterning and multi-patterning going forward, but it's primarily being focused on litho, etch, litho, etch. Do you see any movement towards space-defined double patterning and therefore ALD use away from litho, etch, litho, etch, which is not an ALD user? Do you see that trend unfolding either in your foundry customer base or logic customer base?
Yeah. If your question is if we see patterning applications developing beyond memory into logic foundry, the answer is yes.
Okay. Thank you.
Okay. You're welcome.
Thank you. As there's no more further questions in the queue, that will conclude today's question and answer session. I would like now to turn the call back over to Chuck del Prado for any additional or closing remarks.
Well, I would like to thank you all very much for your attendance today and for your questions. Any follow-up questions, of course, you may have, you can share with us through Victor Bareño, our investor relations officer. Looking forward to staying in touch, meeting you at our shareholder meeting in May or during one of our road shows, upcoming road shows. Thank you again for attending today, and have a good day or a good evening. Thank you very much.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.